It's certainly been an interesting couple of months for bitcoin. It advanced more than 70% during the third quarter and nosedived 25% over four days in mid-November only to rebound astronomically in the days since. Still, even as $20,000 seems like a real possibility before the year is out, these types of wild gyrations are hardly ideal for a currency struggling to gain widespread acceptance.
Jamie Dimon, the chairman, CEO and president of JPMorgan, the nation's largest retail bank, famously said he'd fire any employee who traded bitcoin, calling it "a fraud" and boldly predicting that it would eventually "blow up." Those sentiments echoed past remarks about bitcoin by Warren Buffett, perhaps the world's most admired investor.
Nevertheless, bitcoin and other digital currencies are increasingly piquing the interest of investors, meaning that advisors have likely fielded questions from clients about them. Digital currencies are unlikely to go away anytime soon. Here are three reasons why:
The intersection of political, societal and technological forces will likely boost bitcoin's popularity. Thanks to the internet and other technological evolutions (most notably the smartphone), the world is far more interconnected than ever before, which has enabled a higher level of upward mobility within emerging markets.
At the same time, while many of these markets have adopted looser economic policies, their political institutions haven't evolved at the same pace, still beset by rampant fraud and corruption, as well as an overreliance on a single industry (See: Venezuela).
These conditions often depress the value of the local currency and lead to wealth destruction among would-be members of the middle class. Therefore, as devices continue to proliferate and internet access reaches more corners of the globe, we'll likely see enthusiasm for bitcoin rise, making it easier for people to convert troublesome currencies into a digital alternative.
Bitcoin is a commodity, not a currency—which could help it gain acceptance as a medium of exchange. Yes, a handful of mainstream companies accept it, such as Microsoft and PayPal, but most do not. Also, its supply is finite and set to peak in 2040. This, of course, contrasts with the dollar and other global currencies, which are regulated by centralized authorities that have routinely flooded their systems with money to boost economic activity.
Looking at it this way, bitcoin today acts less as a medium of exchange and a more like a tradeable commodity—a phenomenon that ironically could pave the way toward universal acceptance as a currency in the future. Indeed, because its supply is finite (and dwindling), the demand could continue to spike, burgeoning its legitimacy and increasing the chances that more and more vendors will accept it as payment for goods and services.
Institutional interest in bitcoin is beginning to emerge. Despite Dimon's reservations, many others in the institutional investment community are much more open-minded about the prospects for bitcoin.
Goldman Sachs is reportedly considering a new cryptocurrency-focused trading unit, with CEO Lloyd Blankfein noting on Twitter that people "were skeptical when paper money displaced gold." That came after the Chicago Board of Exchange in August announced plans to introduce bitcoin futures at some point during the fourth quarter.
And now there's news that Dimon's own firm, JPMorgan, is mulling whether to dive into the bitcoin futures market. Certainly, just because investment bank units show interest in packaging or trading product doesn't mean it's a good idea. The financial crisis taught us that much. But this type of interest does suggest that Wall Street potentially sees bitcoin as something other than a niche area of focus.
At this point, there's no way to know whether bitcoin will become a common medium of exchange and lead to a widespread adoption of digital currencies. That's certainly what users and bitcoin advocates hope.
Then, it's always possible that Jamie Dimon is right: Perhaps it's just the latest fad to draw unfavorable comparison to tulip bulbs. Given the current momentum, however, it's far more likely that it's here to stay for the foreseeable future.
John Maher is the chief investment officer at CCR Wealth Management.