Bitcoin: Boom or bust?

WASHINGTON – While the cloud of political uncertainty and nuclear provocation dominates mainstream politics and news, bitcoin and other cryptocurrencies continue to thrive in the absence of regulation and standards-based control.  Earlier today, Bitcoin jumped over $10,000. Some experts say it could rise even further. How did Bitcoin surge to this astronomical rate? Is it still a profitable investment, despite its current value? Or, the bubble will burst and cause financial ruin for its holders? We examine these questions and more.

What is Bitcoin?

Bitcoin is the world’s most popular crypto/virtual currency. It has a ‘tainted’ history, initially being employed in non-traceable digital transactions that involved ransoms and purchase of illegal items on the internet. Bitcoin is not tied to any banks/governments and allows for anonymous transactions.

Astronomical rise and value

Financial markets fluctuate – that’s just a fact. But Bitcoin’s fluctuation, and more accurately rise, has been iconic. It was created in 2009 and was valued at $0.05 in 2010. Fast forward to May of 2017, it touched an all-time high of $2,420. As of November 2017, it rose a little over 4.5 times to hit $10,955! (Current value of bitcoin can be found here)

Boom or bust?

Experts suggest that such ascents are rarely sustainable. And although Bitcoin’s recent trajectory has been manic to say the least, it has shown real uses. Retail investors have piled in, we have seen rise of alternatives (like Litecoin, Ethereum), and “initial coin offerings” (ICOs), in which firms issue digital tokens of their own.

Many people have drawn parallels to gold, where there might be more than just a passing resemblance. Goldbugs mistrust governments and their money-printing tendencies. They also prefer the absence of a central bank/institution that is in charge of their currency. But Bitcoin is more ambitious. It is trying to compete with the dollars, euros, and yens of the world.

Regulators too have a keen eye on the trajectory of Bitcoin. And since there has been no action on that front, bitcoin is operating at its limits and its developers cannot agree on how to increase the number of exchanges the system is able to handle. As a result, each transaction can cost up to $4 in fees and can take hours to confirm.

Bitcoin and Blockchain

Bitcoin can be best understood when paralleled to the rise of the internet. It embodies innovation, technology, and innovation in technology. Crypotcurrencies are experiments to realize how to maintain public databases (blockchain), WITHOUT an entity being in charge. At least two states in India are currently testing blockchain to record land deals (see reference). It is clear that such transactions/records need to be secured and that can be a challenging task in today’s digital world. Fans hope that the rise of such entities will give rise to disruptive and decentralized innovators, challenging today’s technological oligopolists like Amazon and Facebook.

What is of prime importance here is the relation between financial markets, technology and regulation. From the sounds of it, this seems a rather dangerous way of generating innovation. According to the Economist however, risks in crypotcurrencies are limited. They argue that investors are aware of risks involved and that cryptocurrencies are self-contained systems, unlikely to cause contagion. They go on to remark that regulators should be wary of such currencies becoming even more popular for criminal activity, but heed caution on enhanced regulation as it would lead to loss of financial assets, and perhaps more importantly, innovation that might follow.

Source: AP and The EconomistThis news summary is compiled and published by the IndoAmerican Center staff.