Do digital currencies like Bitcoin have a long-term future?

Bitcoin has had a history of extreme ups and downs. — dpa

Bitcoin has had a history of extreme ups and downs. — dpa

Dramatic falls followed by sharp rises followed by more dramatic falls. Crypto-currency exchange markets are giving us all whiplash. With allegations of bad practice leading to investigations into some cryptocompanies, the once booming currency faces uncertain times.

NEW YORK: On Dec 17, 2017, the digital “crypto-currency” Bitcoin tipped over the US$20,000 (RM81,384) mark on some online exchanges. With the seemingly inexorable rise in Bitcoin’s fortunes came an associated wave of hype, and the excitement prompted some to predict that this was just the beginning for the new type of currency.

That all seems a long time ago. The euphoria was short-lived, and the Bitcoin exchange rate has fallen steadily, settling down to around US$3,400 (RM13,836) – a fall of 80% from 2017.

US economist Nouriel Roubini has characterised the Bitcoin saga as the "biggest bubble in human history”, making it – in his view – worse than the Dutch Tulip Mania in the 17th century, and indeed all the other speculative crashes since.

The digital currency – which emerged in 2009 as a way of creating money outside the control of governments and banks – has had a history of extreme ups and downs. In 2011 the price of a Bitcoin plummeted from a then-record-high of US$30 to below US$3.

But 2013 saw a comeback and for the first time the US$1,000 threshold was reached. Even then, there was great scepticism. "There is every reason to believe that the Bitcoin boom will end soon," the Economist magazine wrote at the time. The Bitcoin price did in fact fall, to almost US$200 dollars, and stayed there until the spectacular rise of 2017.

However, the current decline could have a more profound impact on the markets, causing damage that is both more widespread, and more intense. This time round immense sums of money have been invested in digital currencies and the technology associated with them.

What began as a tip for those in-the-know, kept tightly within financial circles, suddenly became something lots of investors – big and small – wanted to have a part of. The hype even led to some companies changing their names to exploit Bitcoins and the Blockchain technology used in the generation of Bitcoins.

The drinks company Long Island Iced Tea became a prime example of the crypto-currency gold rush. The company tripled its share price when it renamed itself “Long Blockchain Corp”. But the success was short-lived and its shares then suffered a dramatic crash, ending up worth just US$0.13 (RM0.53).

The boom was fuelled by controversial advertising campaigns involving celebrities like Paris Hilton and Mike Tyson. The former boxing champion Floyd Mayweather and the hip-hop producer DJ Khaled accepted payment for posting on social media channels about "Initial Coin Offerings" (ICOs), without disclosing that they received money for doing so.

The flood of ICOs – in which companies issued digital coins instead of shares – was perhaps the most obvious warning that the crypto-currency market was overheating. Today, the entire industry, which over-inflated while it was booming, now faces difficult times as it gradually contracts. – dpa