Cryptocurrencies: surge in value prompts fears of ‘dotcom-style' bubble

An explosion in the value of so-called cryptocurrencies over the past year has prompted fears of a market bubble and crash that could have serious implications for the global economy

How have they performed this year?

Over the past year, cryptocurrencies have attained record valuations. The price of Bitcoin, the most well-known cryptocurrency, has soared from $969 in January to more than $5,000 in September. A rival currency Ethereum began the year at $8 and is currently trading at $400.

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According to Token Report, a database of cryptocurrencies, initial coin offerings (ICOs) have raised £2.27bn this year, compared with just £100m in 2016. New coins or tokens are issued weekly, often attached to tech start-ups as a way to raise venture capital.

What is the problem?

Cryptocurrencies were supposed to offer a secure, digital way to conduct financial transactions “but they have been dogged by doubts” largely focused on their astronomical gains in value and the likelihood of painful price crashes, says The Independent.

There are also concerns about the virtual exchanges where billions of dollars worth of cryopcurrencies are traded.

Many are plagued with poor security and lack investors' protections common in more regulated financial markets. The Independent estimates at least three dozen heists of cryptocurrencey exchanges have taken place since 2011 with more than 980,000 bitcoins stolen, adding up to a total value on today’s market of about $4bn.

What is being done to regulate the market?

Earlier this month, the Chinese government defended its decision to outlaw token sales and efforts to outlaw coin exchanges. It follows a ruling by the US Securities and Exchange Commission in July which said ICOs qualified as securities and therefore fell under its jurisdiction.

At the same time, Japan’s government is looking to implement rules that recognise Bitcoin as an official payment method while India and Sweden are also believed to be exploring launching their own virtual currency.

Last month, Goldman Sachs confirmed it was setting up a new trading operation that would make it the first Wall Street bank to deal directly in the crypto market.

However, despite pressure from investors, there is still widespread apprehension among most major banks about entering a market that has traditionally been the preserve of criminals and drug dealers.

Banks say they are also concerned about the due diligence cryptocurrency exchanges do on their customers to guard against money laundering, criminal activity and sanctions violations. It is widely believed that the North Korean government trades in cryptocurrencies as a means of circumventing international sanctions.

So are cryptocurrencies here to stay?

The Guardian says that while opinion is divided on whether cryptocurrencies are approaching the end or “just getting started as a rebellious, anti-institutional, anti-government, frictionless currency, across the board there’s a growing wariness that there could be a correction, a shake-out in the crypto party, especially in the market for initial coin offerings”.

Speaking to the paper, the venture capitalist and crypto investor David Siemer equates the current market of around 1,000 digital currencies and token-like “alt-coins” to 1995-1996 in the dotcom revolution.

“In 1995, the entire internet world was worth around $80bn. The entire cryptocurrency space right now is valued at around $170bn. In 1995, there were 24 million internet users, and there’s not even 20 million in crypto. The analog is almost perfect across every level,” he said.

According to Siemer, the analogy of the dotcom bubble is particularly relevant when predicting what could be in store for the likes of Bitcoin over the next few years.

By the mid-1990s, the dotcom crash of 1999 was still a few years off “but so too was the potential to create economic giants like Google, Amazon and Facebook”.