Why Bitcoin May Still Blow Up

BTC is the future

There are too many unanswered questions about cryptocurrencies and they are not immune from the perils of speculation and fraud.

I've been interviewing people who are not only tech savvy, but considerably more optimistic than I am about the future of cryptocurrencies. Although I believe the idea of alternative currencies is a good concept, we need far more oversight before they are legitimate.

Let's start with the harshest criticisms:

-- Fraud is Rampant. We have no way of telling what's going on since Bitcoin and its sister cryptocurrencies aren't on exchanges and are completely unregulated.

Since transactions are encrypted, it's said that bitcoins are used for illicit exchanges, although I have no good way of proving that.

Although Jamie Dimon, JP Morgan Chase CEO, said "bitcoin is a fraud" last week, his bank is apparently investing in the cryptocurrency, so they're hedging their bets.

Big banks, we should note, have a vested interest in the old money system. Their business is highly regulated and they bet on currencies, stocks, bonds and commodities every day. Those are all regulated and traded for their massive portfolios.

Can you game any of those markets? Of course. Lot at the massive swindle of betting for and against mortgage securities during the credit bubble of 2006-2009.

That's all the more reason you should be wary of any virtual currency. If you don't think it can be manipulated, you're not paying attention to history.

-- The sky's the limit on price. Bitcoin hit $4,000, then receded after Chinese officials said they were going to shut down some Bitcoin offerings (along with Dimon's comments).

But it's not hard to find pundits who have declared Bitcoin could rise to $5,000, even $25,000.

Do the people making price predictions have a financial interest in seeing Bitcoin climb in value? Absolutely, but whenever anyone says a price could rise infinitely higher, I worry about a bubble. It's happened frequently in the past.

-- The Valuation Dilemma. How do you value something? With stocks, you can look at past and future earnings, dividends and sales. With currencies, it's what they are worth relative to other currencies. With bonds, it's the ability of an issuer to pay back investors.

What about cryptocurrencies? What is the benchmark to value them? They have no earnings. There is no regulated exchange gathering market bids on daily valuation. There are no price/earnings ratios.

That doesn't mean that linked computers and users across the world can't create their own market. But no legitimate market works without price discovery and transparency.

As thestreet.com noted in a commentary:

"Outside of some limited use as a means to buy goods and services, Bitcoin's $61 billion market cap is linked to the perception of value.

That is, Bitcoin is bid up out of a belief that others think it's worth something, too, or will do so in the future, even if (unlike traditional currencies) there isn't much demand for using it to buy things."

-- Bitcoin is the next world currency. I couldn't agree more than we need some form of universal currency. Maybe Bitcoin is that vehicle, maybe not.

John Maynard Keynes, the great economist, advocated for a world currency back in the 1940s.

But in order to get banks and governments out of the currency business, there has to be global agreement on the rules of how that currency is valued and traded. Bitcoin has a long ways to go on that accord.