We learned a lot about bitcoin

COSTS AND BENEFITS: IT WILL TAKE TIME TO UNDERSTAND

We should expect continued high price volatility in the context of persistent loud differences of opinion as to what comes next.

Last week was relatively eventful for bitcoin, the cryptocurrency that’s been attracting growing attention from investors, speculators and regulators. Considerable price volatility was accentuated by reactions to commentary about a “disruptive technology” that responds to specific client needs, is here to stay, and will likely gain greater systemic influence.

Perhaps one of the most useful ways to think of bitcoin is as an innovation that reduces the barrier to entry to a payment system outside the direct purview and auspices of central banks and most other official entities. Its admirers and advocates look for the phenomenon to increasingly assume the key characteristics of trusted and effective “money”. In this context, last week showed: The considerable gap in acceptance for cryptocurrencies that still exists, including warnings that they are a “fad” ; The sector’s vulnerability to government actions, including last week’s decision by China to ban certain offerings; The potential for considerable price volatility that, in just three days, caused the value of bitcoins to plummet by 40% and then recover more than 25%. These developments go beyond highlighting the challenges facing the most optimistic vision for cryptocurrencies. They also point to the risk that, as difficult as it is to value the currency confidently, part of this year’s impressive run-up in the price of bitcoins may well assume an adoption rate that exceeds what is feasible.

It’ll take time for cryptocurrencies to develop the depth and stability of a dedicated user base. It’ll also take time for governments and monetary authorities to understand the full array of costs and benefits of this new platform.

The most likely interpretation is that we’re still at a very early phase of a possible currency transformation process that speaks to more than the desire among some for a broader array of credible “money”. Enabled by technological innovations that promise greater efficiency and will likely deepen over time, cryptocurrencies are also a response to the wider phenomenon of dissatisfaction with existing institutions, both public and private.

For now, the operational dimensions of cryptocurrencies will involve primarily speculative activities, cannibalising at the margin the investor base for precious metals, and meeting the demand of those looking, both for legal and for illegal reasons, for a payment system that operates outside the view and reach of monetary authorities.

Longer term, a more stable and regulated platform will likely emerge.

It’ll supplement, but not replace, the traditional monetary system managed by central banks. – Bloomberg View