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Bitcoin: bubble or revolution?

14/11/2017

By Ian Lavis, on behalf of Praxity

Depending on who you believe, Bitcoin is about to implode or continue to gain momentum in the digital revolution. Either way, it looks like cryptocurrencies are here to stay.

Bitcoin, the unregulated​ digital currency, is like an unwelcome but interesting guest at a party. No matter how much it gets criticised it continues to grow in popularity and value.

All that may be set to change in the wake of increasing uncertainty over its future. A growing number of reports have emerged in recent weeks suggesting the Bitcoin bubble is about to burst.

Is it heading for meltdown or will it go from strength to strength? The answer may well depend on how governments and financial institutions respond to the Bitcoin phenomenon and whether rival digital currencies manage to gain credibility.

The threat to Bitcoin

Bitcoin was first introduced in 2008. It broke new ground, firstly as a cryptocurrency and payment system and secondly as the original application of blockchain, the Distributed Ledger Technology (DLT). Blockchain allows cryptocurrencies to be traded and verified electronically over a network of computers without a central ledger. The fact blockchains can be used to underpin different cryptocurrencies means Bitcoin is no longer alone in the world of digital transactions.

For some time, Bitcoin has faced a scaling issue, where the number of transactions that can happen on the blockchain at any one time is limited. This creates a backlog and slows things down. Solutions to the problem are being looked at but rival cryptocurrencies and payment systems are being developed by fintech start-ups and global companies which promise to be faster and more secure.

These include Ethereum, the second most popular digital currency, and the new “utility settlement coin” being developed by UBS in a project supported by Barclays, HSBC and several other major banks. 

The potential of cryptocurrencies

The question is why might citizens and businesses want to use Bitcoin, Ethereum or any digital payment system rather than physical dollars, euros or sterling? The answer is the widely held belief that cryptocurrencies could eventually be a much easier and safer way to verify and settle financial transactions.

Christine Lagarde, the managing director of the International Monetary Fund has made it clear she thinks it’s unwise to dismiss the potential of virtual currencies.

According to an article published in Fortune, Lagarde told a Bank of England conference in London: “In many ways, virtual currencies might just give existing currencies and monetary policy a run for their money”. 

This suggests that while digital currencies may still be seen as niche, they are being taken very seriously by major financial institutions.

Cheaper and more secure

As the technology behind new digital currencies evolves, it is likely that settling financial transactions in this way will become cheaper and more secure, and it may even provide more stability in the global financial system. However, as the market becomes more crowded, it could be tougher for new cryptocurrencies to gain credibility.

There is also the matter of regulation. It is possible governments may eventually crack down on anonymous payment systems that are said to facilitate tax evasion and crime. China’s government has already banned Bitcoin exchanges. Japan, on the other hand, has “enshrined Bitcoin as a legal tender in an apparent bid to be the global centre of fintech”, according to a recent report in The Guardian. 

Whether Bitcoin can survive in the long-run remains unclear but it continues to defy its critics and having gained a foothold in the market, it may yet prove to be more resilient than many people believe. 


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