It’s not credible or bubble proof

The value of Bitcoin, which was no more than $20 at the beginning of the year, has shot up to $1,200. Foreign financial media focused on the stunning ascension in its market stories and reports on Bitcoin billionaires who earned profits of more than 8,000 or 9,000 percent from the spike in the virtual money’s value compared with four years ago. From all the hoopla, Bitcoin may look like a future alternative payment that could one day replace traditional hard currencies. But that’s a far-fetched idea.

Bitcoin does not have the credibility and security a currency fundamentally must guarantee. It therefore won’t be able to establish itself as a mainstream currency. People use currency to buy and sell goods and for financial services because the central bank backs its exchange value. Even though countries no longer set the value of their national currencies to gold, the monetary standard and payment service remains intact because of surety from state issuers. Because Bitcoin was first introduced in January 2009 by a crypto-hacker in the name of Satoshi Nakamoto and created through a complex mathematical formula, no one knows exactly how the online cash is generated and how its payment can be guaranteed. The money is literally virtual - so far nonexistent in the real world.

There is another downside risk because of the fact that Bitcoin has no authorized issuer and regulator. In a traditional monetary system, a central bank controls the money supply to fend off inflationary and deflationary risks. But there is no regulatory mechanism on cybermoney. Its value is determined only and directly from people willing to accept the money as payment. That is why the currency value fluctuates between 20 percent to 30 percent daily on investment sentiment and outside factors and its price can vary from exchange to exchange around the world, sometimes by as much as $200. If the value of the currency remains this volatile, investors won’t feel safe about parking money on it.

The supply of Bitcoin is set by a complicated virtual formula called “mining” that limits its circulation at 21 million Bitcoins until 2140. There are about 12 million Bitcoins in circulation. Under normal market principles, depreciation is inevitable in the future. The spike in Bitcoin value is spurred by investors and speculators betting on its depreciation. It is a similar phenomenon that we have already witnessed during the tulip mania in the 17th century and the technology bubble at the end of the 20th century.

The decentralized virtual currency also poses a serious risk to security and speculation due to the lack of official oversight. Nevertheless, more and more people are enthralled by the digital currency and its use as a means of payment has been increasing through smartphones and computers. Once its use becomes more widespread, its exchange will inevitably exact supervision from monetary and financial authorities. The Chinese government earlier this month issued a warning against the use of Bitcoin and banned banks and other financial institutions from providing Bitcoin-related services and products after China emerged as the second-biggest market for the currency. The United States and other countries raised concerns about its use for criminal or terrorist activities and financial risks and are working on regulative actions.

The virtual treasury is also susceptible to hacking. There are already reports of hacking into coffers of Bitcoin trading and saving websites in Australia, China, and the United States. As these highly sophisticated websites were hacked, individual discretion is seriously advised on how they invest and manage their e-money.

Translation by the Korea JoongAng Daily staff.

*The author is a research fellow at Woori Finance Holdings Management Research Institute.

by Kim Jong-hyun