Is bitcoin headed for a reckoning?

Jamie Dimon, CEO of the financial behemoth JPMorgan Chase, is not a fan of bitcoin.

"It's a fraud," he told a conference on Tuesday. He went on to slam bitcoin as "worse than tulip bulbs" — a reference to the infamous Dutch bubble of 1637.

The digital currency, which is highly encrypted and isn't overseen by any government or central bank, has seen a spectacular run-up in value over the past few months. A single bitcoin is now worth about $4,200. That's fueled speculation that the cryptocurrency is in a bubble, and headed for a crash. Dimon thinks bitcoin's extra-legal nature — which makes it potentially attractive to criminals — is going to come around to bite it. "Someone's going to get killed and then the government's going to come down," he said. And if any JPMorgan trader began trading in bitcoins, "I'd fire them in a second," he declared.

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So is he right? Is bitcoin headed for a crackup, and are the people investing in it fools? The answer might well come down to whether bitcoin can adapt.

At least in one respect, Dimon is probably correct. "Governments like to control their money supply," as he put it. The U.S. government can track and oversee economic activity carried out in U.S. dollars, which helps it investigate and punish lawbreaking. If a large part of the economic activity under the U.S. government's jurisdiction winds up being conducted in bitcoin instead, that could severely undermine law enforcement. For that reason, the American government — or the Chinese government, or any other major government — is something of a natural antagonist for bitcoin.

For instance, U.S. law enforcement has seized hundreds of thousands of bitcoins, same as it seizes other property involved in criminal activity. The Securities and Exchange Commission is also still hemming and hawing about whether to allow an exchange traded fund that invests in bitcoin onto American financial markets. Meanwhile, Chinese government officials, who can be far more draconian and authoritarian than their American counterparts, have already banned bitcoin from all Chinese banks and financial institutions. They're also mulling banning all trades in bitcoin and other cryptocurrencies on Chinese financial exchanges.

At the same time, bitcoin is hardly a monolith. The currency is run by a decentralized network of hackers, software engineers, and other types, who all often disagree about what bitcoin should be and how it should evolve. Debates over whether bitcoin's software code should change to expand its capacity for more and faster transactions have riven the bitcoin community, for instance.

Bitcoin has actually "forked" several times already, with new forms of bitcoin splitting off, but still based on the original software. Almost three-fourths of the computers running bitcoin still use "Bitcoin Core," but there's also "Bitcoin Unlimited," "Bitcoin Classic," "Bitcoin XT," and more.

So how will bitcoin respond to increased pressure from governments? It could stick to its radical and defiant libertarian roots. That seems to be what Dimon is anticipating. But the bitcoin community could just as easily split over the challenge, with some factions altering their code to open it up to oversight by national authorities, and to make bitcoin play nicer with central banks.

Also, many Western governments won't take as direct of an approach as the Chinese. They may just get better at hacking bitcoin's software, or innovate other ways to track bitcoin activity, and thus learn to just live with it. Or they could successfully cajole the bitcoin community — or large factions of it — into voluntarily changing the code. Think of music sharing in the age of Napster, which was eventually overcome by "legitimate" digital music offerings by Amazon and iTunes and the like, through a combination of government pressure and companies adapting to the new digital economic landscape.

So the reckoning Dimon is expecting might not be a dramatic showdown after all. Instead it might be a slow transformation, in which large portions of bitcoin activity are gradually absorbed into mainstream society. In that case, investments in bitcoin made now could easily pay off big down the line.

Of course, another possibility here — or perhaps another factor that could speed along these dynamics — is that bitcoin might well destroy itself even without government opposition.

One reason a Chinese clampdown might hurt bitcoin's prospects is that a lot of bitcoin activity goes through a few key exchanges in that country. This tendency towards centralization has bedeviled bitcoin before, and leaves it vulnerable to government assaults, attacks by hackers, or other mishaps. Bitcoin software is also designed to max out once 21 million bitcoins have been created. (Or "mined" in bitcoin parlance.) The point was to make bitcoin more like the gold standard, on the libertarian theory that central bank control of fiat currencies inevitably leads to disaster.

The truth is rather the opposite: Controlling the supply of its currency is crucial to a government's ability to maintain a stable and prosperous economy. As bitcoin butts up against its supply limit, the bitcoin economy will face bigger risks of destabilization and deflationary recessions. Which will force the reckoning all the sooner.

Of course, the future is hard to predict. While Dimon is clearly skeptical of bitcoin, he's also smartly avoiding any real bets on its fate. JPMorgan may not be trading in bitcoin, but it's not shorting it either.

As the CEO of a massive financial firm, Dimon's reluctance to get involved with bitcoin is responsible and understandable: He and JPMorgan and their many customers and clients have a lot to lose. No reason to take risks on bitcoin's many unknowns. But for everyday investors willing to be both patient and adventurous, the chances of ultimately making out like bandits on their bitcoin investments are probably as good as the chances they'll lose their shirts.