(MENAFN- Khaleej Times) 2017 could well be remembered in global financial markets as the "Year of the Cryptocurrency". Bitcoin has surged from $1000 in March to $11,000 and generated a global speculative mania. Bitcoin's mania evokes the Dutch tulip mania in Rembrandt's Amsterdam, the South Seas bubble in the eighteenth century that bankrupted Bourbon France and led to the 1789 revolution, the Roaring Twenties on Wall Street and dotcom mania in the late-1990s.
The human mind is neurologically programmed to extrapolate the experience of the recent past and so I am not surprised to see friends whose paper riches rise by $5,000 a day on their Bitcoin ETF expect the cryptocurrency mania to continue forever. History, economics and the mathematics of parabolic curves proves that this mania, like all its past peers will end in tears. Bitcoin has risen 30,000 times since January 1, 2011. Initial coin offerings have raised $3.5 billion. The Chicago Mercantile Exchange, the world's preeminent derivatives platform, will launch futures contract on the cryptocurrency. Money launderers, tax evaders and terrorists find Bitcoin an ideal vehicle to store wealth and transact business in a digital, networked world. Blockchain technologies, which spawned Bitcoin, will transform the future of banking.
It is impossible to value Bitcoin by any rational fundamental criteria since it has no intrinsic value and so an investor risks a 100 per cent loss when he or she invests in it. The counter-argument is that an asset can trade in a "bubble" for a long term - even centuries - if it acquires the attributes of money on a global scale. Gold, for instance, trades far beyond its mining cost for no other reason than its acceptance as a monetary metal since the time of Pharaonic Egypt and imperial Rome. Yet Dutch tulips, for instance, crashed because they were not able to supplant gold as a medium of exchange or a store of value. The history of stock, bond, currency, commodity and property markets is replete with a succession of periodic boom bust cycles, manias and bubbles and crashes, across the centuries. Bitcoin's fate will be no different.
International reserve currencies enable their issuers to enjoy an economic bonanza termed "seigniorage" by Lord Keynes. So the US could finance the Vietnam war and President Lyndon B. Johnson's Great Society welfare state without raising taxes in the 1960s, thanks to the Bretton Woods gold-dollar pegs. Yet when the US began running excessive trade deficits and Uncle Sam's gold reserves in Fort Knox were depleted, President Nixon stiffed the world by terminating the gold-dollar peg in 1971. In the subsequent decade, gold soared from $35 to above $800 an ounce, a perfect vindication of Gresham's law - bad money drives out good. In the early 1980s, when the Volcker Fed hiked overnight borrowing rates to 16 per cent, gold crashed to $295.
Bitcoin is now a threat to the American government and the powerful banker's lobby that shapes public policy in the White House. Central banks will be impotent to implement monetary policy in a world of freewheeling cryptocurrencies. Uncle Sam can and will shut the Bitcoin circus down. That much, at least, is certain. There is blatant fraud amid initial coin offerings and crypt-currency exchanges. It is the moral responsibility of government, banks and financial regulators to protect their citizens from the get-rich-quick schemes and tsunami of speculation spawned by the Bitcoin mania.
Last Wednesday's 20 per cent plunge in the value of Bitcoin is an augury of bigger crashes that will send $200 billion in investor wealth to external bliss in money heaven. A cryptocurrency that can lose 21 per cent of its value in two hours can never, ever replace the US dollar or the euro as a global reserve money or act as a credible medium of exchange/store of value. Bitcoin was $11,435 24 hours before. It is $9,700 in Asia as I write. The implied volatility of Bitcoin is more than 100, making it the financial equivalent of playing Russian roulette with a loaded piston to your forehead. Satoshi Nakamoto's Frankenstein currency will ruin millions of speculators across the world.
Ironically, a cryptocurrency designed to facilitate payments is now an instrument of manic hoarding and manic speculation. Its huge transaction fees make it a useless medium of exchange. Bitcoin usage relative to cash is a joke. Transactions can take weeks to be confirmed. Bitcoin can and has fallen 25 per cent multiple times in 2017 alone, making it a poor store of value. This cryptocurrency is, as Jamie Dimon concluded, a fraud, not digital gold, even if it made big money for some prescient speculators.
The writer is a global equities strategist and fund manager. He can be contacted at.
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