The Bitcoin Boom

15

December,  2017

  • Bitcoin futures trading began this week
  • Analysts warn of Bitcoin’s volatility: its value reached $17,000 last Friday
  • Winklevoss twins become world’s first Bitcoin billionaires
  • Bitcoin and blockchain technologies have the potential to innovate financial processes

“Today’s digital world needs cryptocurrencies. One or two of the existing ones will succeed. Whether it’s Bitcoin or not remains to be seen”

– Nigel Green, CEO of deVere Group

After weeks of dramatic fluctuations in the value of the cryptocurrency, the trading of Bitcoin futures opened at the beginning of this week. Investors now can speculate whether Bitcoin will raise or deteriorate in value. The Chicago Board Options Exchange website was overwhelmed with traffic following the launch of its first Bitcoin futures contract on Sunday night. In the first hours of trading, contracts rose from $15,460 to $16,000 in value.

The launch of futures trading arrives after weeks of tracking Bitcoin’s roller coaster volatility. Last Friday the price of one Bitcoin rocketed to $17,000, reaching a new record high, before decreasing significantly again. The volatility of the cryptocurrency has been likened to a “charging train with no brakes” by Shane Chanel from ASR Wealth Advisers, which makes investing in Bitcoin highly speculative.

Last week it was reported that Cameron and Tyler Winklevoss became the world’s first Bitcoin billionaires. The entrepreneurial twins, who sued Mark Zuckerberg for allegedly stealing the idea for Facebook from them, reportedly used their payout to buy 91,666 bitcoins for $120 each in 2013. Last Monday the investment was worth $1.046 billion. The soaring value of Bitcoin then could be attributed to a fear of missing out amongst investors. However, many analysts are unconvinced that Bitcoin is a legitimate currency. Jamie Dimon of JPMorgan Chase has previously called it a “fraud”, whilst UBS Wealth Management recently stated that Bitcoin is the “bubble to end all bubbles”. This is largely due to the fact that Bitcoin’s volatility makes it a poor store of value, thus undermining its status as an actual currency.

Bitcoin is a privately created virtual currency that people choose to buy at a certain rate. Unlike coins or notes, a Bitcoin is a string of computer code and can be used to purchase products online and even offline from businesses that accept the cryptocurrency. User identity remains anonymous when transactions are made as each user is given an address, a string of 27 to 34 letters and numbers, to which the Bitcoins are sent.

One of the fundamental features of Bitcoin is that it allows transactions to go ahead without the approval of a trusted third party. Unlike our normal transactions  which require accountants, governments, or banks to approve and facilitate them, Bitcoin relies on personal computers all over the world to act as these bookkeepers. Information about the transactions, including the date, time and amount, is publicly available and distributed across the network of computers: this is called the blockchain. This underlying technology behind Bitcoin has the potential to transform our economy because there is no need for interference from governments and banks.

As protection of personal data increasingly becomes a priority, the anonymity of Bitcoin is an attractive feature. Users can control their identity because only snippets of relevant information need be provided. The seller does not need to know who you are, just that they have received payment. Another advantage of Bitcoin is fraud prevention: records cannot be changed by anyone else. However, Bitcoin’s protection of anonymity has been criticised for enabling money laundering.

Bitcoin also requires extremely high rates of electricity to operate and this costs much more than processing credit-card transactions, with the cryptocurrency using as much electricity a year as the state of Morocco. Meteorologist Eric Holthaus has predicted that by 2020, Bitcoin will consume as much electricity as the entire world does today. Such predictions may be open to critique, yet, as demand for Bitcoin increases, many warn that Bitcoin’s high energy consumption may prevent the goal of counteracting climate change. The largest Bitcoin mining farms are in China and are powered by electricity from coal-fired power plants. In light of reports of Bitcoin’s “disastrous” cost to the environment, regulating cryptocurrencies to reduce environmental harm may become a more pressing issue.

The question of how we can regulate Bitcoin, therefore, will become one increasingly faced by governments worldwide. The South Korean government is already undergoing meetings to review cryptocurrency regulation and the UK Treasury are updating money laundering laws to address virtual currencies. In the UK, tighter regulations for cryptocurrencies to protect consumers, as well as prevent money laundering and tax avoidance, are expected to come into effect early next year.

Whether Bitcoin is indeed a “fraud” or just the latest investment craze, the launch of futures contracts shows that Bitcoin is working its way into the mainstream. Blockchain is an innovation that is bridging the finance and technology industries. As the number of Bitcoin owners soar, it will be interesting to see how such digital currencies and blockchain technology underpinning them can shape the financial industry as we know it.

 

Written by Amy Preston. Edited by Keval Dattani.

Warwick Congress Blog

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