Bitcoin prices remain nearly half of what they once were in the wake of more technical glitches at Japanese exchange Mt. Gox and talk of a crackdown in the U.S. and Russia. But will the digital currency ever become a viable alternative to fiat currencies? JPMorgan analysts have listed all the reasons they don’t think it will happen.
Listing the problems with bitcoin
Perhaps the biggest problem they see for bitcoin is the fact that it lacks a sovereign entity with a central back which issues the currency and manages its supply. This is actually the very reason many people have embraced the digital currency because they see it as a way to complete transactions virtually anonymously, without the oversight of the government and with zero or near-zero transaction costs using a peer-to-peer payments system.
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The JPMorgan team also notes that bitcoin is very illiquid, with a daily turnover equivalent to the Mauritius Stock Exchange, and 20 times more volatile than the yen. As a result, they think the digital currency is one which investors should steer clear of.
Why bitcoin is so appealing
In spite of these problems, they do realize that there are reasons so many people have become interested in bitcoin. For example, it addresses a number of problems with fiat currencies, like providing “steady, predictable growth” in the supply of money. In addition, it gets rid of capital control risks because there is not central authority, and it verifies fund balances so that fraud is avoided.
The digital currency also gets rid of entirely or at least cuts down on transaction costs for payments because “verifiers are rewarded through bitcoin creation.”
But bitcoin can’t be taken seriously
They draw some comparisons between the bitcoin bubble and the NASDAQ bubble to show just how much more “audacious” the digital currency is. They note that in three years between 1997 and 2000, the NASDAQ quintupled in value, while just over the last year, the value of bitcoin has increased 50 fold.
They also note that it is over 20 times more volatile than the U.S. dollar.
Because of this massive price fluctuation and extreme volatility, they don’t think there’s any way investors should “seriously consider bitcoin as a unit of account or store of value.” Also they don’t think any government will give the digital currency legal tender status, which means that it probably won’t “reach the scale and scope” to make it worthwhile for global commerce or even as a payments system.