Bitcoin: Criminal, profitable, or bubble?

As Bitcoin breaks new barriers and faces new restrictions, is it a bubble preparing to pop or an asset reaching for its highest potential?

(Getty)

Fears over tax evasion and money laundering are pushing the UK, along with other European governments,to regulate the wild west style world of Bitcoin.

It’s an EU-wide plan designed to bring cryptocurrencies into the scope of anti-money laundering and counter-terrorism legislation, meaning that traders will have to reveal their identities.

So far, during the currency’s relatively short life, it has been anonymous, making it attractive for people trading drugs and other illegal items on the so-called ‘dark web’.

The new rules could come into force within the next few months and ensure that the platforms that allow users to trade the currency have to carry out due diligence and even report any transactions that appear suspicious.

It’s a major change and one that could either be seen as a clampdown on something that’s being exploited by criminals or as a stamp of recognition that cryptocurrencies are becoming mainstream, despite the lack of a state that back up its value.

Many people feel this is long overdue.

Julian Dixon, CEO of anti-money laundering and big data specialist Fortytwo Data says that the UK has fallen shamefully behind the rest of the world when it comes to regulating cryptocurrencies.

He warns: “The US is way ahead in terms of regulating cryptocurrencies. The US Treasury classified bitcoin as a convertible decentralised virtual currency in 2013. Two years later, the Commodity Futures Trading Commission classified bitcoin as a commodity in September 2015.

“Scotland Yard has already warned of criminals using special ATMs to launder illicit cash into cryptocurrency and transfer the dirty money abroad. Scare stories about the use of bitcoin on the Dark Web have been common since its inception.”

However, other commentators argue that new regulations signify that Bitcoin and other cryptocurrencies are being recognised as mainstream.

Nicholas Gregory, CEO of London-based cryptocurrency agency CommerceBlock, said: “What some will bill as censure, the cryptocurrency community will deem a stamp of approval that finally recognises the pivotal role that digital currencies will ultimately hold for the global economy…

“Industry players want the same thing as politicians - cryptocurrencies that offer cheap, frictionless, international transactions used for legal purposes.

“If anything, regulation will only increase Bitcoin's rate of growth as regulation lends credibility and engenders trust.”

A bubble or an opportunity?

For many people the question about Bitcoin and other cryptocurrencies are not how it’s regulated but whether it’s safe to buy into.

While the meteoric rise in the value of Bitcoin has been a tech news staple for several years, in the last few months it has become far more mainstream news as the currency continues to smash new highs.

At time of writing (and boy, can these things change fast), a single Bitcoin is worth £8,791. It was big news when it broke £5,000 at the start of November.

Back in January this year they were worth less than $1,000. To a lot of people, that looks an awful lot like a bubble. To a handful of early adopters, it’s been more like a lottery win; this week the world gained its first Bitcoin billionaires.

Of course, it’s not just moving upwards. After hitting a record high worth of $11,395 on the 29th November, the currency immediately plunged by $2,000. That’s understandable to a degree, whenever an asset or currency reaches a particularly high value there will be some profit-taking, which can depress the price.

And today the price has already exceeded November’s high, although that may have changed by the time of publication.

For some would-be investors and users, this makes it too volatile to touch.

Kit Carson, head of banking and fintech at GlobalData, says: “With only 21 million bitcoins able to be ‘mined’ you have a classic situation here where limited supply generates market excitement, high demand and prices go up.”

Carson is correct that the eventual supply of Bitcoin is limited. As of December 3rd there are 16,718,138 that are in circulation and no one is entirely sure what will happen to the currency one the last coin has been mined.

He adds that normal currencies, such as the Hong Kong Dollar, can be properly understood by investors as they know that the Hong Kong Monetary Authority are controlling it via interest rates. “Value is based on a clearly understood and transparent entity, the performance of the Hong Kong economy.

“However, nobody knows what the levers are for Bitcoin or whether it is a currency to be traded or an asset to be held onto.’’

Despite that, some investors are extremely bullish about its prospects.

Some investors and commentators refer to cryptocurrencies, others to crypto-assets. It is certainly not supported or used in the way that a typical currency is.

And while it’s easy to throw around references to Dutch tulip mania, the go-to illustrative bubble, the fact remains that Bitcoin is unlike anything that has existed before.

Sir Jon Cunliffe, deputy governor at the Bank of England for financial stability, recently told BBC Radio 5 Live he does not view it as a currency.

“This is not a currency in the accepted sense. There’s no central bank that stands behind it. For me it’s much more like a commodity,” he said.

“This is not at a size where it’s a macroeconomic risk to the global economy, but when prices are moving like that, my view would be investors need to do their homework.”

Of course, if you don’t fancy the actual risk of Bitcoin or another cryptocurrency then you could always have a flutter on its movements instead.

Bookmaker Betway has Bitcoin at 11/8 to break $20,000 before the end of 2018 and ½ that McDonald’s will be accepting the currency by then.

A spokesperson said: “I’m not sure how many fractions of a Bitcoin it would take to buy a Big Mac but it looks like we’ll start finding out sooner rather than later!”

If the current volatility persists, burger buyers might find the currency changes too fast to predict whether they can afford 10 Big Macs at the counter… or none.

The writer has Bitcoin investments