Without a doubt, the biggest investment story of 2013 was Bitcoin, with a gain in value for the virtual currency of over 10,000% within a year. And then, the bubble burst, but although the price subsequently rebounded to a certain extent, two events in the couple of days have cast serious doubts over the future of Bitcoin.
One was the indefinite closure of the aforementioned Mt. Gox exchange due to what has been described as a technical malfunction, meaning that users could no longer make withdrawals from the site. The other was the news that Russia had followed China’s lead in banning Bitcoin, partly because of its use by criminals, and partly because “its price is determined solely by speculative actions that entails a high risk of loss.”
Bitcoin’s main strength for many users is its anonymity, but this may prove to be more of a weakness when it comes to gaining mainstream acceptance. In the US, state regulators are currently mulling over regulation for digital currencies, and while this points to a future where they will be accepted into the mainstream, it may not be feasible for Bitcoin to do so due to its inherently secretive structure. However, efforts at self-regulation by could pave the way for Bitcoins to be accepted as a mainstream currency, and regulated as such.
In an article published yesterday on beta.tradingfloor.com, Saxo Bank Co-Founder and CEO Lars Seier Christensen put the case for a new wave of more straightforward – and easily regulated – digital currencies to spring to the fore.
“Bitcoin will face serious challenges in the long run, although I believe such digital currencies could have a place in the economy in more well thought-through structures with values better linked to real assets. There is no doubt that many central banks have made a mess of things with their own fiat money without linkage to reality, and it is entirely conceivable that the private sector could also in the area of currencies do a better job than public sector institutions. It does in pretty much every other area under the sun, so why not here?”
“Anything in the financial space that can be regulated will be regulated. Get used to it! This will also apply to digital currencies. But regulation could be their ticket to real acceptance and success — and should therefore not be seen only as a negative.”
“Bitcoin is still a very small part of the economic system and will not pose a serious threat to more established models any time soon. But if it does one day and it overcomes regulatory issues, it will be embraced.”
“Bitcoin is increasingly used by migrant workers to transfer money back home, and is therefore beginning to serve really genuine purposes, not just ideological ones, which is promising to see.”
This article was originally published on Hedgethink.com, a thought leadership platform with a focus on the hedge fund industry. Click here to view their full range of daily content.