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Why Is Everyone Worrying About Bitcoin Now?

Sep 27, 2017
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SMITH BRAIN TRUST – It seems like everyone is sounding the alarm lately about bitcoin and the ever-expanding world of cryptocurrencies.

It's a fraud, says Jamie Dimon, CEO of JPMorgan Chase. It's a bubble, says Ray Dalio, founder of the world's biggest hedge fund. And Chinese authorities have banned some cryptocurrency activity in that country.

It's not surprising that people are raising concerns, says Joseph P. Bailey, associate research professor of decision, operations and information technologies at the University of Maryland's Robert H. Smith School of Business.

Bitcoin, the largest and most well-known of the growing class of digital-based cryptocurrencies, has always been volatile, but over time its price trajectory generally has been steep and upward. So, for example: Its 52-week trading low was around $752. But, earlier this month, it touched a historic high at $4,950. Then came a sharp rebuke from JPMorgan's Dimon that sent the virtual currency plunging to around $3,030. Within days, it was marching higher again. It's not easy to knock bitcoin down.

"Overall the price has gone up tremendously," says Bailey, who is also the executive director of the Smith School's QUEST Honors Program. The higher the prices go, curiously, the more demand there seems to be. Add to that mix the fact that there is no government entity controlling the monetary policy or otherwise tempering the increases, and bitcoin's valuation has been a rather heady brew for much of its young life.

Bitcoin's volatility and surging prices are part of why Dalio says the cryptocurrency meets his criteria for a market bubble, along with the fact that bitcoin and its many peers can't be used to buy things in a practical way.

Still, the market capitalization of all cryptocurrencies topped $130 billion this month, up from $7 billion in January of 2016.

"It's creating something out of nothing that to me is worth nothing," Dimon said in an interview with a CNBC affiliate in India last week. "It will end badly."

Dimon's comments likely reflect an increase in the number of JPMorgan's customers who are curious about cryptocurrencies, says Bailey. And maybe he has heard a rising chorus from customer-facing bank reps about the customers who lament not making as much money with their JPMorgan accounts as they might have made from bitcoin.

"And so Jamie Dimon is lashing out and saying, 'Well, it's a fraud.' It doesn't conform to the way in which we think of any other types of commodities or products or services," says Bailey.

The global financial sector remains cool to bitcoin and its ilk. The world's largest cryptocurrency is known in the dark web as the currency of choice for drug traffickers and others involved buying or selling illegal goods and services. For the regulated financial sector, which is banned from knowingly enabling illegal commerce, that poses a sizable risk, says Bailey.

"Trying to stay away from bitcoin altogether is one way of dealing with it for Jamie Dimon and for other banks," Bailey says. But there are other ways, he adds, suggesting the creation of a "shadow stock," an asset that's associated with bitcoin. "Instead of owning bitcoin directly, you can would be able positions on an option to buy or sell bitcoin without actually being a part of that transaction."

Cryptocurrencies can be transferred anonymously across countries and they aren't under the authority of any one government or central bank. They've drawn an odd mix of supporters – from civil libertarians and technology enthusiasts, to criminals and hackers.

Dimon, in its latest comments about cryptocurrencies, warned that if bitcoin and other cryptocurrencies become too big, governments eventually could choose to shut them down. And that's when the bubble, if it is a bubble, would probably go "Pop," says Bailey.

Authorities in China recently announced a broad crackdown on virtual currencies. Its central bank, the People's Bank of China, declared the Initial Coin Offerings, or ICOs, of new cryptocurrencies illegal, a move that effectively banned crypto exchanges from trading in ICO tokens. It also demanded that startups that raised funds through the ICOs would have to issue refunds to investors. It's reportedly considering further measures as well.

The moves come as number of virtual currencies around the world has been rising, along with the number of startups raising money through ICOs, or initial coin offerings. More than $2.2 billion has been raised through ICOs this year alone, according to Coinschedule.com's tracker. There are other developments, too, that how wild the craze is.

In 2011, bitcoin was trading around parity with the U.S. dollar, a 1-for-1 even exchange it has not seen since. Had it continued trading at those levels, the world likely would not have seen such proliferation and popularity of cryptocurrencies. But bitcoin continued to rise, and with it, exuberance and demand.

"We are in this nascent stage. No one really knows what's going to happen next," says Bailey. "I mean, have you ever seen anything like this?"

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The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.