Bitcoin turns 10 at the end of the month. And over the past decade, there has been no shortage of headlines about the inevitable rise—or the inevitable fall—of it and other cryptocurrencies.
Along with all the talk came a meteoric increase in bitcoin’s price, culminating late last year. Bitcoin’s price soared nearly 1,332% in 2017, hitting a high of $19,783.21 on Dec. 17. Since then, however, bitcoin’s price has plummeted more than 66% to around $6,436, as of Oct. 19.
The price gyrations have come as the cryptocurrency is getting increased scrutiny.
In August, the Securities and Exchange Commission rejected nine proposals for bitcoin exchange-traded funds. Before that, the SEC rejected, for a second time, a bitcoin ETF proposed by entrepreneurs Cameron and Tyler Winklevoss. Getting approval for a bitcoin ETF could go a long way toward helping the crypto market attract mainstream retail investors, but the SEC has concluded that there isn’t enough transparency in the cryptocurrency markets to be sure prices aren’t being manipulated. The Wall Street Journal recently reported how bots are manipulating the price of bitcoin on crypto exchanges.
A report from the New York Attorney General’s office in September shared some of the SEC’s concerns.
Meanwhile, Fidelity Investments announced last week that it will store and trade digital currencies, including bitcoin, for hedge funds and other professional investors
And bitcoin is a hit in developing and frontier markets—where the cryptocurrency is often viewed as a haven from political and economic turmoil and a way of navigating financial obstacles, including a lack of conventional banking services.
Amid all this, the debate over the long-term prospects for bitcoin as a viable and dominant currency continues.
By Lisa Ellis
Bitcoin, approaching its 10th birthday on Oct. 31, is having a tough 2018. As of late October, the price of the cryptocurrency is down about 54% year to date, and has not cleared $10,000 since early March. And it has suffered a series of rejections and delays by the Securities and Exchange Commission in attempts to launch bitcoin ETFs.
The 2018 setbacks are, in my view, the normal growing pains of a developing technology, and bitcoin will prevail. The cryptocurrency has a long-term role in society as a universal, alternative currency—functioning both as a medium of payment and store of value, in economies where the fiat currency is unstable or subject to manipulation.
First, the need, and demand, for an alternative to fiat currency exists. Data from the International Monetary Fund’s World Economic Outlook show that 50% of the world’s population lives in one of 98 countries that have had at least one year in the past 10—since bitcoin has existed—when inflation was above 10%.
In countries with high inflation, or an otherwise unstable fiat currency, people can’t trust that the government-backed fiat currency will hold its value, and they seek an alternative, such as gold, traditionally. I believe bitcoin will fill this need in the future.
Consumer-payments companies, such as Visa, Mastercard, PayPal and Alipay, are working to digitize cash in order to drive out corruption and improve global financial inclusion. But even they are reliant on the stability of the underlying fiat currency. As bitcoin emerges as an alternative to unstable fiat currencies, I believe you’ll be able to make a transaction on a credit card in bitcoin, just as you can today in dollars, euros, yen and other currencies.
Bitcoin enables secure, arm’s-length transactions between two unknown parties, the bar required to function as a payment system. And bitcoin is decentralized and open-source, enabling it to morph and adapt to usage requirements organically.
Bearish views on bitcoin rarely argue with these design characteristics, however. They typically focus on current limitations, arguing that bitcoin will never achieve the requisite level of stability, transaction capacity, security, ubiquity of merchant acceptance, governmental blessing, and trust to function as an alternative currency and payment system.
Slowly but surely, though, bitcoin is addressing these limitations. Some examples:
• Stability: The December 2017 launch of bitcoin futures on the Cboe and CME enables short selling of bitcoin, which is essential to reducing volatility over the long term.
• Capacity: An oft-quoted statistic by bitcoin bears: The bitcoin network processes only seven transactions a second, while the Visa network, for instance, does about 65,000. So, bitcoin is not usable for making payment transactions day-to-day, because the system can’t handle the volume. This is currently true, but keep an eye on the nascent, but promising, Lightning Network initiative, currently in test mode. If it is successful, bitcoin’s processing capacity would jump to thousands of transactions a second, making the system much more viable for making payments.
• Security: Perhaps the biggest Achilles’ heel of bitcoin is security. Not security of the network itself. Rather, securely storing the cryptocurrency so it can be readily accessible, while still safe from hackers. It’s a tricky one, hence the recent high-profile crypto heists (e.g., Coincheck, Coinrail).
Progress is being made, however: Dozens of offline hardware wallets custom-designed to enable individuals to securely (and anonymously) store cryptocurrencies are available on Amazon for less than $100. Earlier this year, Noble Bitcoin launched a fully-insured cryptocurrency custodian service, using a Texas-based cold storage location that already houses gold, silver and platinum.
• Merchant aceptance: Dozens of bitcoin merchant processing services, which enable merchants to take bitcoin, already exist (BitPay, BitPOS, Coinbase, etc.). While low today, as consumer demand and comfort with the system grow, merchant acceptance will naturally follow.
• Governmental blessing: Despite the theoretical threat it poses to fiat currencies (such as limiting a government’s ability to enact monetary policy), few countries outright ban bitcoin. Many major countries—including the U.S., Japan, Australia and many in Europe—are sorting through how to appropriately classify it: a commodity vs. currency vs. security. This classification, I believe, will establish the regulatory and legal frameworks for cryptocurrencies, which then will enable secondary services, like insurance, which help build consumer trust.
While the price of bitcoin is having a tough 2018, quietly, in the background, the bitcoin system is making steady progress toward becoming a viable, universal alternative currency.
Ms. Ellis is partner and senior equity analyst at MoffettNathanson LLC, covering payments, processors and IT services. Email her at reports@wsj.com .
By Tim Swanson
How could we measure the domination of cryptocurrencies? Many vocal enthusiasts point to their hypnotic price action.
Yet the total notional valuation of bitcoin and other cryptocurrencies is suspect since the value (measured in U.S. dollars) is in no way related, or attributable, to a utility-driven value.
In other words: The price is not related to its use.
While they will likely continue to find their place in portfolios of speculators and already-wealthy investors, the current crop of cryptocurrencies like bitcoin is not designed to meet the usability expectations for the average consumer. And that’s on purpose.
Bitcoin was trying to solve a problem in allowing unidentified participants to send “electronic cash” to other unidentified participants on a payment network that provided no insurance, customer support or means of recourse. But most consumers who could potentially obtain cryptocurrencies live in an environment where the identities of participants are known and where legal recourse is expected. Consequently, cryptocurrencies aren’t really solving an existential problem in their life.
A recent analysis from Chainalysis, which aggregated payment activity of the 17 largest coin-payment providers, found that the bitcoin blockchain processed about $70 million in payments for the month of June. A Morgan Stanley note from last summer found that merchant adoption is virtually zero.
In practice, since most coin owners typically accrue coins as speculators, it probably doesn’t matter if merchants’ support for coin payments grows in the future. These speculators typically already have access to other forms of payment that they use instead.
While many proponents are keen to say that bitcoin users can be their own self-sovereign bank, in practice most users still deposit their coins in a trusted intermediary like an exchange. According to Chainalysis, last year more than 80% of transactions on a blockchain such as bitcoin used a third-party service.
This means that a majority of coins are now being housed in centralized locations, coin exchanges and custodial wallets—where the private key for controlling coins is managed by a trusted third party—instead of physically spread across the entire user base. Because of these large concentrated coin holdings, to date, all but a handful of the major cryptocurrency exchanges and wallets have been compromised, some more than once. And victims typically have no recourse.
Many bitcoin enthusiasts also argue that bitcoin can enable secure, arm’s-length transactions. But bitcoin has been around for nearly 10 years and the cryptocurrency still sees less daily user activity than Venmo, Square Cash, WeChat Pay and other mobile-payment platforms that are neither open source nor decentralized.
As a result, over the past several years a number of vocal promoters have attempted to switch the narrative—promoting cryptocurrencies like bitcoin as functioning the way gold traditionally has. But this is revisionist history. If functioning as an electronic form of gold—not an electronic form of cash—was the original goal, the design of cryptocurrencies would have allowed for an elastic money supply. But at the moment, there is a fixed amount of bitcoins that can be created.
And the headline prices we saw last year? A couple research notes, including ones by JPMorgan and Citi, estimated that less than $10 billion of real money from investors actually moved into all cryptocurrencies last year. Since then, retail investors likely have been tapped out, hence the price decline following the peak of the price bubble in December and January.
The Federal Reserve estimates that in aggregate, all of the payments, clearing and settlement systems in the U.S. process about 600 million transactions a day (valued at about $12.6 trillion). Bitcoin confirms about 300,000 transactions a day, the aggregate value of which is dubious and a matter of debate since it can be difficult to slice the data.
Another continuing challenge is that cryptocurrency exchanges support a form of price discovery for a virtual coin that is typically measured by regulated sovereign currencies. This is potentially problematic because the futures contracts for bitcoin in the U.S. are settled in dollars, instead of delivering the underlying bitcoin. To settle a contract in a professional market against a price index constructed over and derived from a quasi-regulated retail market is an open invitation for all sorts of shenanigans.
The Securities and Exchange Commission continually highlights that this chronic lack of transparency and surveillance does not protect investors. It’s why there are still no bitcoin ETFs.
As measured in real money, the coin bubbles will likely reflate and deflate over the coming years, but it is unlikely that cryptocurrencies like bitcoin will become the dominant form of payments for mainstream users.
Mr. Swanson is founder and director of research at Post Oak Labs. Email him at reports@wsj.com.
