Bitcoin is back, baby.
Prices for the alt-currency are over $10,000 per coin, a gain of nearly 43% in 2020. Even Bitcoin advocates are calling it overbought.
Reporters blame the coronavirus, which they say has caused investors to flee risk assets. Over the last year, Bitcoin has outperformed gold — the traditional risk-off asset. Gold is up less than 20% over the last year, while Bitcoin prices have nearly tripled.
Helping drive prices higher is a slowdown in mining. The search for new encryption keys usually takes place in China, the center of the epidemic. As Bitcoin approaches its maximum supply of 21 million, new solutions become harder to come by.
That said, this phenomenon of limited supply — with potentially unlimited demand — drives up prices at times of stress.
The Banks Rush In
When cryptocurrency is riding high, big banks rush into the space. That’s because the underlying blockchain technology can — when properly applied — move vast amounts of value around the world at low cost.
Furthermore, universities now offer classes in blockchain. JPMorgan Chase (NYSE:JPM), which launched a stablecoin system called Quorum in 2016, is now thinking of merging it with a start-up. Meanwhile, Wells Fargo (NYSE:WFC) plans to launch its own Wells Fargo Digital Cash, a cryptocurrency tied to real money for international financial transfers, this year.
Additionally, Will Cong, an associate professor of finance at Cornell, has produced formulae for valuing cryptocurrency. His work has focused on platform tokens, those traded within a single market. Soccer clubs like F.C. Barcelona have recently been creating platforms to exchange fan tokens, and these mini-markets can be measured.
“The platform is a small open economy and users are its citizens,” Cong explains. “Tokens help accelerate adoption for good platforms and precipitate demise for bad platforms.” As platform markets are better understood, he added, measurements can be done on product tokens that let companies evaluate demand, and security tokens that can stand in for stock.
Bad Guys Still Abound
Bitcoin and blockchain don’t just enable markets. They’re also vectors for crime.
Chainalysis, a blockchain research firm, estimates criminals sent $2.8 billion to Bitcoin markets in 2019. And overall, total market losses from thefts, hacks and fraud came to $4.5 billion for the year. With the Bitcoin market estimated to be worth $187 billion, illicit use of cryptocurrency is thus about 2% of the market.
One example is a Dutch extortionist who has so far eluded capture after exploding four letter bombs demanded his victims pay in Bitcoin. The Department of Justice has defined “mixing” of trades, meant to hide traders’ identity, as a crime, arresting a software developer for money laundering.
Furthermore, President Donald Trump — who has tweeted that he is not a fan of Bitcoin — wants to increase the budget for fighting Bitcoin crime in fiscal 2021. In turn, this will bring the Secret Service inside the Treasury Department.
Bitcoin advocates, who never met a government regulation they like, continue to insist government is killing innovative startups while encouraging crime. Big crooks can corrupt government, they say, while small entrepreneurs get crushed because it’s easy to do.
The Bottom Line on Bitcoin
Blockchain’s features are also bugs. Anonymity and the easy transfer of value are empowering. But with that, criminals are empowered along with everyone else.
The same problems of ordered liberty that bedevil relations between government and the Internet are also abound in cryptocurrency. Governments want to define who is good and who is bad, and good guys with a modem insist they can tell the difference themselves. But they can’t.
Collectively, the rules for Bitcoin are evolving. Bitcoin traders resist control over the technology by either big banks or governments. So despite the trappings of bankers and business suits, the Wild West of Bitcoin is still not fenced in.
Dana Blankenhorn has been a financial and technology journalist since 1989. He is the author of a mystery novella involving Bitcoin, The Reluctant Detective Saves the World. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM and WFC. To follow the value of cryptocurrencies bookmark https://coinmarketcap.com.
