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Crypto currency bitcoin has rarely been out of the headlines.
First the price highs, then the dramatic decline, and now ongoing volatility caused by concerns over greater regulation.
Bitcoin remains the most popular crypto currency by some margin with a market share of around 35 per cent, despite the introduction of around 1,500 others. Although interest in them persists, we do not think cryptocurrencies will rival traditional money any time soon.
In the early years, interest in bitcoin was muted, but this has changed in recent years. The price of bitcoin skyrocketed, reaching a high of nearly USD19,500 in December 2017. Since then, crypto currency prices in general have tumbled by around 65 per cent, supporting claims that they had been the centre of possibly the largest speculative bubble since the global financial crisis, although prices have stabilized more recently.
Regulators around the world are taking different approaches to managing the crypto currency hype: while China has banned crypto currency exchanges and the Reserve Bank of India has recently stopped the transfer of money into bitcoin wallets, a bitcoin futures index has been launched in the US and Japan has accepted bitcoin coin as legal tender.
“A major problem is the anonymity bitcoin provides, which has encouraged its use for illegal activities”
A Digital Token
The advantages of owning crypto currencies like bitcoin are generally held to be threefold: firstly, bitcoin has lower transaction times and costs through its peer-to-peer function; secondly, it provides a level of anonymity; and finally, as bitcoin is supposed to have a fixed lifetime supply, it is also seen as a hedge against the sort of hyperinflation that can result from central banks printing too much money.
Despite these advantages, however, we expect bitcoin to remain a digital token, at best, with little potential to rival traditional money or even a commodity like gold. To be accepted as money, bitcoin would have to fulfill certain important functions.
According to recent research by the University of Sydney (Foley et. al.), almost half of all bitcoin transactions are associated with illegal activity, such as drugs or terrorist financing.
Unstable, Risky
The decentralized nature of crypto currencies implies that there are few, if any, safety nets for users in the event of a collapse in prices or panic selling, making crypto currencies inherently unstable. Traditional currencies, by contrast, have central banks standing ready to stabilize and defend their value, acting as lender-of-last-resort during times of systemic crisis.