Since its creation in the wake of the 2008 global financial slump, regulators have struggled to bring bitcoin, a digital currency, under control.
Considered illegal or illegitimate, the Securities and Exchange Commission has derided the approval of bitcoin exchange-traded funds, with a disclaimer “it is a currency at an early stage and its future seems bright.”
Yet, even with the disapproval, bitcoin is gaining traction. Daily transactions have been on a meteoric rise; from $0.08 (Sh8 ) in July 2010 to more than $20,000 (Sh2 million) in December this year. There is also an increasing number of countries authorising its use as a legal means of payment, including Japan and Philippines. Russian authorities hope to legalise it as a financial instrument by next year.
The global growth of cryptocurrencies has been epitomised by Facebook, Google and Apple, all of which have implemented a browser, referred to as API, that will facilitate easier purchasing of goods and services online with cryptocurrency. Microsoft and PayPal have also endorsed its use, while the Nasdaq stock exchange has seemingly added cachet by planning to offer bitcoin-futures contracts.
Last Sunday, bitcoin futures began trading at the Chicago Board Options Exchange, the world’s largest options exchange, a development seen as a major step towards legitimising the digital currency. Although the CBOE futures does not involve the actual bitcoin, this is a milestone to the virtual currency that Warren Buffet has ridiculed as a “joke and mirage”. Bitcoin’s legitimacy is expected to be cemented further next week by a listing on the Chicago Mercantile Exchange.
There is little doubt that bitcoin is making its way into mainstream investing, and some Kenyan investors — out of greed and the fear of missing out — are being tempted into it. The emergence of numerous cryptocurrency “seminars and trainings” and bitcoin clubs is an indicator that the iconic digital currency is gaining currency in Kenya.
However, is the bitcoin craze a Christmas gift or a gigantic speculative bubble?
Unlike Jamie Dimon, the boss of JPMorgan Chase, who recently disparaged bitcoin as a “fraud, an investment for drug dealers and murderers”, the International Monetary Fund’s managing director Christine Lagarde has shared the rosier outlook of virtual currencies, saying they pose little or no challenge to the existing order of fiat currencies. Reasons? They are too volatile, too risky, too energy- intensive and the underlying technologies are not yet scalable.
As it appears, Kenyans need to understand what these virtual currencies are before they put their money in them. Common sense dictates that you put as much money as you can afford to lose. This is because there are still many doubts if indeed bitcoins can be used as normal currency, even as its rise seems unstoppable. No doubt, bitcoins can be used to buy a few things.
It is worth noting that due to bitcoin’s volatility, which saw its value drop by about 20 per cent late November before rebounding, it makes a poor store of value and a means of exchange. It would even be dismal as an account debt; imagine if you had a bank loan in bitcoins. In 2017, alone, the bank debt would have risen tenfold. In all fairness, the opposite is true; to those investors who bought bitcoin earlier in the year, they are delighted with the profits made so far.
It is open to doubt if the exponential price rise is informed by the market forces. But to me, this looks like a rerun of the Tulips Mania of the 17th century, the South Sea Bubble of the 18th century or the dotcom boom of the 20th century. How do you explain the creation of not just millionaires but billionaires out of virtual reality?
At the beginning of 1637, some tulip contracts reached a level more than 20 times the level of three months earlier. Semper Augustus, a rare breed of tulip, was riced at around 1,000 guilders in the 1620s. And just before the collapse, in February 1637, it was valued at 5,500 guilders per bulb, almost the price of a house in Amsterdam. The price swings were not caused by massive changes to production costs. Nor did tulips suddenly become particularly useful. Tulipmania was the result of financial market irrationality.
Bitcoin’s spectacular surge this year has all the hallmarks of a speculative bubble; its future will end with a bang. Its crash will be driven by the prices becoming out of reach for the common man, ultimately its demand will fade.
Investors need to be guided by rationality rather than optimism. No wonder Credit Suisse CEO Tidjane Thiam says bitcoins are ‘the very definition of a bubble’.
The writer is an economist.