If 2017 goes down in the books as anything, it'll likely be "the year of the cryptocurrency." Headed by bitcoin, the aggregate cryptocurrency market cap grew by more than 800% at one point this year. Bitcoin comprises nearly half of the aggregate cryptocurrency market cap by itself. By comparison, it's taken decades for the broad-based S&P 500 to deliver a similar return.
Beam me up, bitcoin
Why the sudden surge in digital currencies?
Some would say it has to do with the blockchain technology that underlies most cryptocurrencies. Blockchain is nothing more than the digital decentralized ledger that records transactions without the need for a financial intermediary like a bank. Because these networks are often open source, it's practically impossible to alter data while going undetected, which makes blockchain a potential upgrade in safety and security.
More than 150 organizations are currently testing out a version of Ethereum's blockchain network via the Enterprise Ethereum Alliance , and bitcoin recently completed an upgrade to its network known as SegWit2x, which is designed to boost capacity, while lowering transaction fees and settlement times. It should help bitcoin appeal to big business in much the same way Ethereum has thus far.
The falling U.S. dollar has been another catalyst for bitcoin and other digital currencies in 2017. The dollar hit more than a two-year low against the euro, and more than a one-year low against a host of other currencies, in recent weeks. While that's bound to put a smile on President Trump's face, as it should boost U.S. exports, it's bad news for investors who are seeing their cash devalue relative to other currencies. Traditionally, investors seek the safety of a finite resource like gold as a store of value when the dollar drops. Lately, though, some have turned instead to bitcoin, since it, too, is considered to be a finite resource. Bitcoin's protocols limit the number of coins that can be mined to 21 million.
Momentum is another catalyst that can't be overlooked, albeit it's far less tangible than the two other catalysts. Since bitcoin isn't recognized as legal tender by most governments (Japan recognized bitcoin as legal tender earlier this year), financial institutions are often barred from trading or holding it in their investment portfolios. That leaves bitcoin's pricing predominantly up to retail investors, who are far likelier to trade based on emotion than logic. It's quite possible the "don't miss the boat" mentality has been pushing bitcoin higher.
Bitcoin may be worthless according to these well-respected finance moguls
While numerous bitcoin enthusiasts and pundits have come out with price targets of $10,000, $25,000, and even $1 million on bitcoin, other respected finance moguls have taken an exceptionally bearish view on bitcoin. In fact, a few are unsure if it holds any value at all.
That's right, the most revered stock investor in the world, and the greatest buy-and-hold investor of our generation, believes bitcoin to be something of a sham. In an interview with CNBC back in 2014, here's what Buffett had to say:
"Stay away from it. It's a mirage basically. It's a method of transmitting money. It's a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money? I hope bitcoin becomes a better way to do it. But you can replicate it a bunch of different ways. The idea that it has some huge intrinsic value is just a joke in my view."
Admittedly, Buffett hasn't exactly been correct about bitcoin, with the digital currency significantly increasing in value since his opinion back in 2014. Nevertheless, Buffett raises an exceptionally good point that modes of payment, and even blockchain technology, have a very low barrier to entry. There isn't much to protect these digital currencies against competitors entering the space.
Jamie Dimon, the current CEO of the largest bank in the U.S., JPMorgan Chase (NYSE:JPM), might be bitcoin's biggest critic of all. A few weeks ago, in an interview with CNBC at its annual Delivering Alpha conference, Dimon didn't mince his words when referring to bitcoin as a "fraud." Said Dimon, "It's [bitcoin] just not a real thing."
At a separate conference earlier in the day, Dimon also said, "It's worse than tulip bulbs. It won't end well. Someone is going to get killed. Currencies have legal support. It will blow up."
In addition to this commentary, Dimon noted that if any of JPMorgan Chase's money managers were to trade or hold bitcoin, they would be "fired in a second." It's pretty evident that bitcoin represents a threat to traditional banking if it continues to grow in popularity, but Dimon may also be correct that without any sort of central backing, legitimizing digital currencies like bitcoin may prove impossible.
Lastly, Nobel Prize-winning economist, professor, and New York Times columnist Paul Krugman has had serious doubts about the long-term survival of bitcoin for years. Back in 2013, Krugman penned an op-ed for The New York Times in which he said:
"So far almost all of the bitcoin discussion has been positive economic – can this actually work? And I have to say that I'm still deeply unconvinced. To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why bitcoin should be a stable store of value."
You'll note that while bitcoin has been the asset of choice instead of gold as of late for some investors, it's not a true finite resource like gold. Bitcoin's protocols could always be changed, meaning more than 21 million coins could eventually be mined. Plus, without government backing, there's nothing placing a floor underneath the value of bitcoin.
Though all three of these finance gurus have been dead wrong about bitcoin thus far, I'm mostly in agreement with their theses. Bitcoin has been driven higher by emotion, the technology behind it is relatively easily to duplicate, and its decentralized nature makes legitimizing the currency all that much tougher. We very well could be on the verge of a bitcoin bubble.