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In cryptocurrencies, tech and speculation meet

Jamie Dimon says the cryptocurrency bitcoin is a “fraud,” and if any of his traders dealt in it they would be sacked for sheer stupidity. Given that he runs JPMorgan Chase, which makes its money from shuffling traditional currencies around, one might suspect Mr Dimon of talking his own book. Is he?

Financial authorities increasingly agree with him. China has banned companies from issuing their own token currencies, and is considering proscribing cryptocurrency exchanges. On Tuesday, the UK’s Financial Conduct Authority issued a terse warning on initial coin offerings, which followed a similar comment from Hong Kong’s market regulator.

Mr Dimon is clearly correct in one sense: there is an irrational speculative bubble in cryptocurrency prices. The value of the best-known digital currency, bitcoin, has risen eightfold in the past year. A lesser known currency, Ripple, saw its notional value increase from $500m at the start of the year to $35bn, before plunging to $19bn.

Comparisons with Dutch tulip bulbs are obligatory wherever speculation takes hold. In the case of cryptocurrency, though, the parallels are eerie. Bitcoin started off as a coders’ hobby in 2008. The modern equivalent of the tulip trading “colleges” are online forums. The underlying logic of both is that a greater fool will always be ready to pay a higher price. As in any case where price is completely separate from intrinsic value, the supply of fools must eventually be exhausted.

The speculation draws additional support from the new trend of ICOs. Start-ups are issuing “tokens” — a sort of substitute for a share in an initial public offering — in exchange for cryptocurrencies like bitcoin. The start-ups then exchange the bitcoins for money to fund operations. In some cases, the tokens are intended to increase in value along with the business. More than $1.8bn has been raised in ICOs.

Unlike traditional securities, which must face regulatory scrutiny and offer financial disclosures, any coder can write a “white paper” and start a new currency or issue a token. If a traditional company goes bust, investors and creditors are entitled to recoup what they can from the remaining assets. Its hard to tell if ICO tokens represent a real claim to anything at all. They scream out for abuse.

The growing interest in these instruments may, in some part, reflect pressures in the larger financial world. Investors are starved for yield. There are fewer equity securities to buy (due to buybacks and private equity) and those that remain look expensive. Gambling on ICOs, in other words, may be a byproduct of years of low rates, ample provision of liquidity by central banks, and de-equitisation.

Whether open-source digital currencies, in the absence of hysteria, could be a useful alternative to government-issued money is a hard question. But the underlying technology of distributed ledgers or blockchains has promise in non-monetary contexts. Last month, six of the world’s largest banks joined a project to use blockchain technology to speed up trade settlements, freeing up the capital that the old settlement system requires. Blockchain could also help tidy up discrepancies in shareholder registers, which have led to lawsuits.

Mr Dimon is right: fools are gambling in cryptocurrencies, and more fools will be taken in by bad ICOs. That, however, leaves open the possibility that the underlying technology could prove useful, and could come within the global regulatory framework. In finance, innovation and speculative hysteria often appear side by side.

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