The digital cash known as Bitcoin has appreciated in value this year, and earlier this week investors were positively betting on a new financial product based on it. Trading in the very first futures contracts for the virtual currency was on the 10th root volatility. The futures contracts allow investors to speculate on whether Bitcoin will go up or down.
Also this month, the price of a bitcoin on the Coindesk bitcoin exchange reached its all-time high of more than $ 17,000. The value of a bitcoin was around $ 1,000 at the beginning of the year.
What does this high interest rate mean for the decentralized virtual currency, which is not supported by any country’s central bank? Tufts Now asked Bhaskar Chakravorti, Senior Associate Dean for International Business and Finance at Fletcher School and Executive Director of Fletcher’s Institute for Business in the Global Context, to explain the future of Bitcoin and other cryptocurrencies.
Tufts now: Bitcoin’s value has always fluctuated, but this year it has skyrocketed, increasing 17-fold since the beginning of the year. What do you think of such volatility?
Bhaskar Chakravorti: The volatility is understandable because we are in the very early stages of a phenomenon that is largely based on people assuming that other people will continue to see value in this matter. If you’re in those early stages when people don’t quite understand what this object is, then it lends itself to volatility. There is a crowd coming in, and then it can dip in a bit, and then there is another onslaught. It’s natural given the stage in the life cycle.
Is It Time To Invest In Bitcoin? Or is the bubble in danger of bursting?
At this point in Bitcoin’s life, anything is possible.
The very first futures trading for Bitcoin caused a stir this week, and two more major futures exchanges will soon start trading their own cryptocurrency futures. Why do you think there is so much interest?
For the last year or so there has been tremendous excitement over the technology behind Bitcoin, namely blockchain – a system that is extremely resistant to tampering. Countless people have talked about how blockchain is the future of how we will organize transactions of all kinds, whether it’s supply chains or the way insurance works.
The attractiveness of the blockchain is that the information is distributed across many systems; There is no single authority overseeing this, so there is an element of trust that is distributed rather than centralized.
People are thrilled with the underlying notion that there is no top-down authority and essentially the collective intelligence or crowd that keeps things in place. It’s kind of a Wikipedia for transactions. One theory is that because of the excitement about the underlying technology, there has been a resurgence in interest in Bitcoin, which was then reflected in the lead time we are currently experiencing.
Bitcoin was originally intended as a payment system for everyday things like groceries and rent, but few people now use it for actual goods and services. Instead, it is treated as an investment, like gold or silver. Do you think Bitcoin or other cryptocurrencies will become more widespread for everyday payments?
If the value of Bitcoin, or one of those cryptocurrencies, remains as volatile as it does now, it’s hard to imagine that it will become a means of payment, simply because if I pay you with Bitcoin today, I wonder what will happen to the value tomorrow, and I’m going to regret paying you something worth $ 17,000 today that could be $ 20,000 tomorrow. If at some point in the future the value of this cryptocurrency stabilizes, I can imagine that it will be used for payments, but we are not there yet.
How does decentralized digital money like Bitcoin fit in with your vision that we are moving into a cashless future?
We are increasingly moving into a world where we use virtual means of payment instead of cash – from plastic credit cards to digital wallets to Venmo, PayPal’s mobile payment service. Cryptocurrency is part of this long and growing range of alternatives to cash. Should the value of Bitcoin stabilize, it could become a means of payment and an alternative to cash. I don’t want to speculate about when that will happen.
There is a parallel problem that I find interesting. That is the concept of trust and how much trust we embed in the digital ecosystem overall. Many questions related to trust arise. How real is the information I get on the screen? How real is the news? How reliable is the search result? How reliable is the restaurant review I just got from Yelp? There’s also a notion of trust when it comes to what happens to my financial information. What if Equifax is hacked or if my data is stolen by a thief, troller, or foreign power? What happens to my life afterward if someone else has my social security number? It’s very hard to turn that around.
Cryptocurrencies could be a way for us to make these types of virtual payments without the information being hacked. The underlying technology is more trustworthy, at least in the opinion of some people, because the core information is not stored in one place, but is spread across hundreds of thousands of computer systems around the world. It is very difficult for someone to collect all of this and get into my financial and other life.
Heather Stephenson can be reached at heather.stephenson@tufts.edu.
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