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17th of January 2018

Economy



Stay in bitcoin and other cryptocurrencies for the long haul

Peter Smith

December 20, 2017

Less than a year ago, a single bitcoin, the most popular digital currency, could be purchased for less than $1,000. This month it touched almost $20,000 on some digital asset exchanges, and recently has been trading for about $15,000.

To put things in perspective, it took nearly seven years for bitcoin to reach the price it fetched in January before this bull run. And the current market capitalisation of cryptocurrencies represents “only” half a trillion dollars, a mere drop in the ocean of the global financial services industry which is worth many multiples of that. The most ludicrous projections are being extrapolated from the growth of the past few months.

The voices of professional optimists are countered by warnings from Cassandras made uncomfortable by the exponential rise of cryptocurrencies. Both sides fail to see the significance of the adoption of such currency by millions of people around the world in 2017.

Fundamentally, the digital currency revolution is not about returns for early investors. The finite supply of bitcoin encourages a positive price cycle as the ecosystem that rewards early buyers grows. But the legitimate concern currently expressed at the rise of bitcoin misses what is most significant about the paradigm shift that is taking place.

Historians will look at 2017 as the advent of a new form of trust. Money, after all, is nothing else: trust, inscribed and put into operation. In the past 12 months, millions have shown themselves willing to trust a stateless digital currency based on mathematics.

Beyond finance and macroeconomics, the potential political implications for those who see the return of nationalism not as a renaissance but as the nation state’s swan song can no longer easily be dismissed. ​

Of course, many of these people live in countries where runaway inflation, bank failures and economic crises are not once-in-a-lifetime phenomena but regular occurrences. But even in so-called high-trust societies, the bitcoin rush is far from irrational. Some of the world’s most credible central banks are tiptoeing their way towards the emission of sovereign digital assets.

It is easy to focus on the fluctuation of this or that crypto-asset and to miss the big picture. We are only beginning to grasp the seismic nature of the changes induced by ubiquitous, secure, decentralised ledgers and the quasi-instantaneous clearing they make possible.

Over the course of the past 12 months, digital currency developers and market places have been hacked, while companies have been overwhelmed by their own growth and seen their systems and teams buckle under the pressure.

As the industry grows, many more companies will encounter the same problems. Indeed, rapid growth comes with countless challenges. Building a new financial system is volatile and risky. But one only need look back at the beginnings of our modern banking system, which underpinned the unprecedented growth of the past century, to realise that today’s nascent digital currency system is actually quite tame.

The value of bitcoin, and other digital currencies, will rise rapidly. Until it falls, just as fast. Investors with a short-term view will lose money, much like those who sold their stock after the dotcom bubble. Investors should only invest if they believe in the long-term vision of creating a global, stateless, opt-in financial system. They should also be prepared to hold their position for a very long time. I know I am.

The writer is co-founder and chief executive of Blockchain

This article has been updated to tag it to the correct author

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