It is a “fraud”, the JP Morgan CEO, Jamie Dimon, said this week. “It’s worse than tulip bulbs … it will be the emperor with no clothes”. He was talking about the internet cash system bitcoin.
It will eventually “blow up”, he said, it’s not a “real thing”. “It will be closed.” Any JP Morgan trader caught buying or selling bitcoins will be “fired in a second” – for “being stupid”, he added.
Bitcoin will always divide opinion – as a non-government system of money, inevitably so. Its most ardent supporters think it will eventually become the reserve currency of the globe. Its sternest critics think it will die a death. It is not hard to work out the side of the fence on which Dimon sits.
Bitcoin was devised in reaction to what happened in 2008 during the financial crisis: printing money, bailing out banks, suppressing rates. The idea was to create a system of money beyond the manipulative hands of government. Although JP Morgan was by no means the most leveraged of the banks, it still took bailout money, and, as its CEO, Dimon and bitcoin will inevitably be philosophically opposed. His utter faith in the US dollar sounds rather like the boss of a major record label talking up CDs a year before the iPod was brought to market.
That said, despite the fact he does not understand bitcoin – which, as the CEO of a major bank, he should – Dimon’s comments do bear some consideration.
First, he says it’s a fraud. Actually, bitcoin is perhaps the most transparent system of money ever invented. Every transaction that has ever taken place, no matter how big or small, is recorded on a database, known as the blockchain, which is shared on hundreds of computers around the world and visible to all. Every entry is permanent. The whole system is built, not on fraud, but on mathematical proof. Hence bitcoin aficionados will say, rather than “In God we trust” as you find on a dollar, but “In proof we trust”.
However, there are many fraudulent operators at work in the bitcoin space. Bitcoin is used for trading illegal goods; indeed, it has actually facilitated dark markets. One bitcoin exchange, Mt Gox, was hacked and had some 900,000 coins stolen, making it one of the greatest heists in history. Today fortunes are being raised in minutes via ICOs (initial coin offerings – the crypto equivalent of an IPO) for ventures that will not go anywhere beyond yachts and cocaine. So there is something to what he says, even if the system itself is inherently anti-fraudulent.
Dimon declares that we will use the technology – blockchain technology – but that bitcoin will be shut down. That’s like saying we will use football pitches, but football players will be banned. One comes with the other. In any case, you can’t just shut bitcoin down. It’s a decentralised, distributed network. That’s the whole point of its design. There is no central point of failure.
Even so, he raises a good point when he says: “There will be no currency that gets around government controls.” If bitcoin becomes a threat to government tax revenue, the law will move in on the companies and individuals operating in the space. But given the multibillion-dollar investment that has gone in, the US government would have the most almighty legal fight on its hands if it tries to make bitcoin illegal. Here’s the paradox: the bigger it gets, the bigger the threat it becomes, and the harder to shut down.
Dimon says he’ll sack traders who trade it. Last time he denounced bitcoin (he has previous) was late 2015 – Bitcoin’s value is now about 1,000% higher. Who’s the stupid one? Would Dimon really sack traders who netted him a 1,000% increase in less than two years? I’m not sure JP Morgan’s shareholders would approve.
Finally, Dimon declares bitcoin is a bubble. You need to define what a bubble is. Tulips were a bubble built on very little. The dotcom frenzy was a bubble in 2000, but the story was right: the internet did change the way we do things. Railways were a bubble in the 19th century: but rail changed the way we travel. In both cases, the bubbles meant the infrastructure was built. Something similar is happening now. For sure the price has got crazy – but bitcoin has a long track record in seemingly crazy prices. When does it end? Perhaps at $100,000 as Dimon suggests; perhaps the bubble ended last week at $5,000. Nobody knows.
The interest is vested. Those who own bitcoin say its value is going higher because they want it to go higher. Those who don’t, say it’s a bubble, perhaps because they’re jealous that other people are getting rich when they’re not. As I always say: a bubble is a bull market in which you don’t have a position.
If bitcoin was going to disappear, it would have disappeared by now. It’s here to stay, though I’d say it is unlikely to replace the primacy of the US dollar. Rather, we are headed into an age in which multiple currencies coexist, some private some public. There are already more than a thousand cryptocurrencies, each designed for a different purpose. In a few years, just as we have different apps on our phones, so will we have different “wallets” with different currencies: one we might use for tipping (dogecoin), another for transactions we want kept private (monero, zcash) another for fast transactions and so on. It’s rather Hayekian.