Despite volatility, bitcoin isn’t going away

Bitcoin is here to stay.

Not in its current form, to be sure. But cybercurrencies, or cryptos, have shown remarkable staying power despite epic plunges in value.

The latest one, in recent weeks, has wiped out more than $1 trillion (U.S.) in crypto value as part of the investor flight from all risk assets, including tech stocks.

Most of that loss has been taken by holders of bitcoin, by far the largest of the several thousand cybercurrencies.

Crypto needs regulation of what is now a lawless jurisdiction in which users of these digital currencies have practically no protection from fraud and other losses.

The crypto industry also requires a classic shakeout that yields a handful of cybercurrencies that are trustworthy, efficient, and backed by real assets.

That separation of winners from losers recalls a dot.com craze that produced a lot of ill-fated companies epitomized by Pets.com.

But that boom also gave birth to Amazon.com Inc., the western world’s biggest retailer.

And it launched an adoption of e-commerce that was already widespread before the pandemic supercharged that phenomenon.

Bitcoin’s ardent users and investors know from experience that plunges in value have been followed by rebounds so powerful that record prices have been set, or about $68,000 at last November’s peak.

After its latest plunge, bitcoin trades in the $30,000 range. Even at that humbled price, it is valued at more than nine times its 2018 low of about $3,200.

The faith of crypto adherents is all-important in understanding crypto, which instead is routinely

dismissed as a serious part of the financial system because of its volatility and its favoured status among criminals.

That faith accounts for the steady increase in total crypto value, number of crypto users, and increasing variety of crypto-related investments, including derivates, exchange traded funds (ETFs) and crypto-backed mortgages.

At its most recent peak, last year, the combined value of cryptos was estimated at about $3 trillion, or some five per cent of the world’s financial assets.

With its growing importance, crypto has been gradually co-opted by traditional financial markets.

That process has been underway since the previous decade, when commercial banks and other large financial institutions started to adopt blockchain. Blockchain is the system that evolved alongside crypto to process crypto transactions and store investors’ crypto holdings.

Among other virtues, blockchain technology speeds financial transactions, and is an effective tool for verifying and conferring the ownership of assets.

Now, there is a rush by traditional financiers to buy into crypto itself.

During crypto’s latest swoon, Fidelity Investments, the U.S. mutual funds giant, said last month it will enable 23,000 of its employer clients to include bitcoin holdings in employees’ 401 (k) retirement plans, a U.S. counterpart to Canadian RSPs.

This month, Goldman Sachs Group Inc., the large U.S. investment bank, and Barclays PLC, a leading U.K. commercial bank, were among the blue-chip investors in a four-year-old crypto investing platform, or exchange, called Elwood Technologies LLP.

Back in 2018, during crypto’s deepest-ever plunge, Warren Buffett said crypto is “probably rat poison squared.”

But in February, Buffett’s conglomerate, Berkshire Hathaway Inc., disclosed that it had bought $1 billion worth of stock in Nu Holdings Ltd., a Brazilian online bank that enables its 50 million customers to trade in crypto.

As noted, there are practically no rules of the road for crypto activity.

At this point those rules seem most likely to come from central banks, more than 100 of which, including the Bank of Canada, are developing their own cybercurrencies.

So far, however, all but a few central banks have held off on launching cybercurrencies, still uncertain that crypto serves a market need.

Yet crypto’s rapid asset growth in just 13 years of existence — total crypto value is now pegged at about $1 trillion after the recent downturn — proves that crypto does cater to a sizable market.

That is notably the case in “underbanked” regions like that served by Nu Holdings. It also includes underserved districts of Canadian cities.

If history is any guide, the total value of cybercurrencies will once again eclipse its previous record high.

That calls for urgency in bringing crypto in from the cold.

“The more crypto grows — the more it insinuates itself into the financial system and attracts leverage investors,” a recent Bloomberg editorial warns, “the greater the chances that the next (crypto) rout will trigger broader contagion.”

In other words, crypto could grow large enough to endanger the entire financial system.

Which means the central banks will soon face a tough decision.

Do they try to overpower the existing cryptos with new cybercurrencies of their own? That would risk pushing the non-state cryptos back into the shadows beyond regulatory reach.

Or do the central banks design their new cryptos to coexist with a handful of reputable independent cryptos with international reach and agree to regulatory compliance and compatibility with central bank cryptos?

In either case, crypto is part of our cashless-society future. By the end of the decade, it will be as familiar as Visa and Mastercard are today.

Despite its recent volatility, cryptocurrencies, like bitcoin, will become as common as Visa or Mastercard within the decade as we become an increasingly cashless society, David Olive writes.