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The bloodbath in bitcoin has only just begun Why cryptocurrencies are doomed to fail

The Macro View

Numbers on a digital screen

Jamie Dimon, the unanointed king of Wall Street and chief executive of New York banking colossus JP Morgan did not mince his words. He called bitcoin “a fraud”, a speculative bubble comparable to the Dutch tulip mania of the 17th century and declared he would fire any trader at his bank trading in the cryptocurrency “in a second” for “stupidity”. This has only reinforced the bloodbath in bitcoin, which has plunged 30% from its recent peak of $5014 on 2 September saddling credulous “investors” with $20 billion losses. The Economics 101 definition of money includes that it be a medium of exchange, a store of value – and a currency whose US dollar value plunges 25% in six consecutive sessions is obviously a poor store of value or medium of exchange. The world’s central bankers and securities regulators have also begun to crack down on bitcoin. The Chinese government banned its use as a unit of account in initial public offerings on the domestic stock exchange. Even the DFSA, the regulator of Dubai’s international financial centre, has issued a warning to the public against bitcoin fraud.

Gold was accepted by humankind as a store of value, de facto money, millennia ago and the gold standard once anchored the monetary policies of Britain and America. The rise of sterling as a global reserve currency correlated with the British Empire’s role as the sole global superpower after the battle of Waterloo in June 1815. The US dollar replaced sterling as the world’s dominant reserve currency after the United States emerged as the world’s banker and military/economic hegemon after World War Two. The $5 trillion daily turnover foreign exchange market, the Eurobond market, the IMF special drawing rights, global trading in oil and commodities, World Bank project finance lending and the syndicated loan market all backed by the US dollar, which in turn is backed by the “full faith and credit” of Uncle Sam, history’s wealthiest and most powerful issuer of paper currency. Bitcoin, in comparison is a joke, a cryptocurrency prone to speculative mania, with daily volatility that exceeded 10% in a single session last week. This is no unit of account. This is no medium of exchange (try paying for a Dubai taxi ride with bitcoin!). As more central banks ban its use, bitcoin will become even less convertible than a Third World banana republic’s currency. Cryptocurrencies have been used in the dark web by terrorists, drug dealers and money launderers, making bitcoin classic fool’s gold or, as we say in Wall Street, the ultimate sucker’s bet. It is only a matter of time before cryptocurrencies are banned by governments worldwide and become worthless.

As in any speculative bubble, the only winners will be those who get in early and got out well before the bubble burst in September 2017. This will be a miniscule fraction of current bitcoin investors. Most investors will be, sadly, wiped out. There are dozens of cryptocurrencies that are in the pipeline that use blockchain technology. Sooner or later, the world’s most powerful governments will collude to destroy this embryonic threat to the usage and value of their national currencies. This much, at least, is certain.

The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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