interest, interest 2017

Cryptocurrency: Prophecy or Fallacy

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By Dayrius Tay

 

The advent of cryptocurrency has rung alarm bells in governments around the world, as they either clamp down hard like China recently did or jumped onboard like Russia. As a techie, it is tempting to jump to conclusions and view the stance of governments through the tinted glass of a conspiracy theorist. Why hinder the progression of humanity into a cashless future invulnerable to the whims of governments? Every rose has its thorns, while it is almost certain that governments have ulterior motives, the revolutionary power of cryptocurrencies brings along a plethora of issues that might be viewed as inevitable teething troubles or fatal flaws, depending on one’s affinity to technological advances.

Tax evasion has been the bane of civilisation for millennia. From ancient biblical references to notorious contemporary tax dodgers like Al Capone, examples of this felony abound. Due to the lucrative nature of this sin, people are willing to jump through hoops to conceal their (sometimes ill-gotten) gains. The cash is typically put through a complex web of offshore shell companies that frustrates government attempts to track down the money. In this information age, the rise of cryptocurrencies is beginning to transform how cash is hidden. Cryptocurrencies offer a low cost and anonymous method of storing funds through purchasing cryptocurrency like Bitcoin or Ethereum – no bribery or convoluted network needed.

This characteristic of most cryptocurrencies creates a breeding ground for questionable transactions or even outright illegal activity to take place. Cryptocurrencies maintain the anonymity of cash without the hassle and risk of detection that a physical meeting brings about. On the Dark Web, most transactions are paid in Bitcoin, which is also the medium of choice for extortionists and other criminals. Someday, cryptocurrency investors could be more concerned about the next major porn website takedown than an upcoming fiscal crisis.

In the first 9 months of 2016, the price of Bitcoin rose by an order of magnitude. This caught many investors off-guard, but is now attributed to the surge in interest in mining Ethereum. Even the values of leading cryptocurrencies fluctuate like penny stocks, a headache to market analysts and a golden opportunity for opportunistic speculators. This kind of volatility is reminiscent of the infamous dot-com bubble at the turn of the millennium, where the price to earnings ratio was 90:1, far above the typical value of 18:1. But cryptocurrency is treading in uncharted territory, lacking the metrics used to monitor stock markets and much history to learn from – it has only math on its side to guarantee integrity of the system. There is no central bank or government to step in should things go awry. Speculators and miners are taking a plunge into the unknown with cryptocurrency.

Another historical curiosity with many parallels drawn with cryptocurrency is Tulip Mania in the early 17th century. Tulip Mania likely began when tulip prices rose. Opportunistic Dutch merchants seized the moment and bought tulip bulbs hoping for further price increases, with their enthusiasm in snapping up tulip bulbs artificially driving up prices. This self-perpetuating cycle continued until a tulip bulb sold for ten times the annual wage of a skilled craftworker. At this point, most bulbs were beyond the reach of even affluent speculators, which caused demand to crash, catalysing the abrupt collapse of the speculative bubble.

Cryptocurrencies is a Pandora’s box, promising either preposterous returns or utter failure. With JPMorgan’s chief denouncing bitcoin traders as ‘stupid’, only time will tell whether his words were from visionary foresight or a stubborn reluctance to embrace a paradigm shift in finance.

Disclaimer: The author owns some Ether

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