How bitcoin's bubble could yet be burst
Bitcoin and bubble have become virtually synonymous in the minds of many sceptics during this year's breathtaking rally. While the digital currency has defied doomsday prophecies, the party could yet end badly for the swelling ranks of bulls.
So far Bitcoin has proved resilient, but be warned: many of the potential causes of death have surfaced during the past few years, and have proven unable to bludgeon bitcoin into oblivion thus far.
The multiple offshoots of bitcoin could cause the world's largest digital currency by market value to cede its crown. Divides among developers as to how to proceed with upgrades to bitcoin's network have led to "forks", in which different versions of the currency are spun off from the original. Excessive fragmentation could prove a bug for bitcoin.
Given bitcoin's chequered history as the means to purchase illicit materials, a vehicle for capital flight, and a victim of theft, it's no surprise that regulators around the world have cast a watchful eye over the asset class. As such, the spectre of a complete crackdown on cryptocurrencies remains an ever-present tail risk.
UBS Group chief investment officer Mark Haefele said the wealth manager wouldn't dedicate funds to bitcoin because "all it would take would be one terrorist incident in the US funded by bitcoin for the US regulator to much more seriously step in and take action". Federal Reserve Chair nominee Jerome Powell said bitcoin isn't big enough to matter right now, but it could be "in the long, long run".
Governments and central banks can tolerate bitcoin as a fringe player, but not mainstream adoption that threatened governments' ability to collect taxes or the efficacy of monetary policy.
Ever since the 2011 breach of the Mt Gox exchange, bitcoin owners have had to face the possibility that their intangible asset may fall into the hands of hackers. The Tokyo-based exchange filed for bankruptcy February 2014, alleging there was a high possibility that what was then nearly half a trillion in bitcoin had been stolen.
The collapse of Mt. Gox was accompanied by steep declines in bitcoin, as was the $65m theft of the digital currency from Hong Kong exchange Bitfinex in 2016. The cryptocurrency recovered though, to post fresh highs.
At present, most options investors have for shorting cryptocurrencies are fairly expensive and risky. CME Group, Cboe Global Markets and Nasdaq are planning to offer bitcoin derivatives - a move which seems poised to introduce more two-way traffic to the asset class.
With futures from reputable, established exchanges in play, more investors may take short positions that put pressure on prices. The introduction of bitcoin futures could ultimately hit valuations. The institutional credibility gained by being picked up on exchanges could evaporate should the cryptocurrency's fluctuations serve to disrupt wider financial markets.
Ir CME Group, Cboe Global Markets and Nasdaq are planning to offer bitcoin derivatives - a move which seems poised to introduce more two-way traffic to the asset class.
It's been a puzzle to explain why bitcoin's gone parabolic. Why would we expect the way down to be any different?
The practical applications for cryptocurrencies to facilitate legal commerce appear hampered by relatively expensive transaction fees and the high energy costs associated with mining at this juncture. Nobel Prize-winning economist Joseph Stiglitz said that bitcoin "ought to be outlawed" because "it doesn't serve any socially useful function".
Perhaps it could end like the dot-com bubble - with investors who have no clue how to value high-flying assets fleeing for the exit en masse.