Is Dimon right about Bitcoin (and cryptocurrencies)?

Cryptocurrency (https://pixabay.com/en/credit-card-bitcoin-digital-chip-2033313/)
Cryptocurrency

At an industry conference organised by Barclays, Jamie Dimon, CEO of JP Morgan, stated “Bitcoin will eventually blow up. It’s a fraud. It’s worse than tulip bulbs and won’t end well.” Before examining the accuracy of his assessment, he did manage to put another dent in an already much dented valuation of Bitcoins (BTC). At close of business on 13th September, one BTC was trading around US$3800. This is a significant drop from the almost US$5000 which one BTC reached a fortnight earlier.

Jamie Dimon, JP Morgan (https://www.linkedin.com/in/jamie-dimon-65634172/)
Jamie Dimon, JP Morgan

Is Dimon right about Bitcoin? Does he have a point?

Arguably, Dimon is an interested party. Banks, especially large banks like JP Morgan, do not look at Bitcoin with much relish. They see a non-fiat, electronic currency over which there are few or no regulatory controls. As Domin put it: “Governments, when they form themselves, form their currency. Governments like to control currency, know where it goes, and who it goes to, and control it for monetary purposes. There is nothing behind a Bitcoin, and I think if it was big, the governments would stop it. I mean that’s my own personal belief, I may be dead wrong.

Also, few financial institutions have much, if any ,’skin in the Bitcoin game’, and for good reason. It is, therefore, more convenient to dismiss, by whatever means, the possible destabilising effect if conventional customers replace boring banking to start chase glamourous returns. Remember what happened in the dot.com era.

Yet, prima facie you can understand where he is coming from. His reference to tulips harks back to the great Dutch Tulip bubble of the 1637s. Demand rocketed, then crashed.

Finally, the PBoC (People’s Bank of China) has come down hard on cryptocurrencies, including Bitcoins, and their exchanges. Most activity, other than mining, is no longer permitted. Why did the PBoC take such a stance? Because it worried about a frothing market and the risks that might follow.

On these bases, Dimon’s comments carry weight.

But there is more…

An aspect that Dimon did not explore, and to be fair his was just one comment in a broader set, is the threat represented by control over the blockchains which underpin BTC and other cryptocurrencies. When Satoshi created Bitcoins he presumed that there would always be a surfeit of miners competing to earn bitcoins by processing transactions onto the blockchain. Then it was a reasonable assumption and the degree of distribution of processing ensured no-one could obtain control.

Today that is no longer a given. As discussed elsewhere in ET, a consolidation of miners has occurred. More and more of blockchain processing has become concentrated in fewer hands. Once one participant, or even a cartel, gain more than 50% of the processing, then several of Saroshi’s key assumptions which ensure distributed integrity can come into question.

The argument, ‘why should anyone want to do this if it would destabilise all?’ is a fair one. Unfortunately the 16.5M Bitcoins already mined are cumulatively worth several trillion dollars. Even a small share represents a lot of money. Broadly the same applies to other cryptocurrencies and the more than US$150B they total.

Regulated, managed and secure control of blockchains underpinning cryptocurrencies is a key concept. Assessment of cryptocurrencies should occur, along with other prudent measures, by using this as a lens.

What does this mean

Dimon did not support his assertion with facts. It was not the moment (or no-one has reported the details). The difficulty with all cryptocurrencies is ensuring that nobody, nor any grouping, is able to assert control in a way which damages other participants. In the current cryptocurrency environment this must be a constant fear.

Now add tulip mania for cryptocurrencies with the growing excess of misplaced enthusiasm and the dangers become clear. That Dimon might have disparaged Bitcoin out of self-interest or dislike is not relevant. What is relevant is the existence of conditions where fraud or unfair manipulation can occur.

Look at the big picture and it is not pretty. Trying to discriminate between what is a ‘good’ cryptocurrency and what is ‘not’ almost forces the choice – play safe.

That is not to say that BTCs will incur his apocalyptic crash. They may not. But betting on the horse you don’t know is to chase fool’s gold. Equally  betting on every horse in every race to be able to claim you have won in each race is just as daft (and expensive).

PS That does not mean Dimon believes blockchain technology is dead. Quite the reverse. “The Blockchain is a technology, which we’ve been studying (along with a couple of other people up here) and yes it’s real. It could probably reduce the cost of real application in certain things. It’s keeping a single file, as opposed to each of us keeping our own files, and it has certain security measures. If it proves to be cheap and secure it will be adopted for a whole bunch of stuff….

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