WHEN WILL THE BITCOIN BUBBLE BURST?

Bitcoin has followed a volatile path to growing acceptance since its creation in 2009 with its price fluctuating between USD 0.30 and 1135 in its short existence. But bitcoin is now accepted as payment by a growing number of mainstream merchants and has been increasingly legitimized by governments such as that of the United States, which auctioned off 30,000 bitcoins in June.

In this interview Finance expert Arturo Bris analyses the risks associated with bitcoin.

Is there a speculative bitcoin bubble?

Arturo Bris: This is one of bitcoin’s major risks. The reason is that its supply is restricted. Unlike normal currencies, central banks cannot issue additional bitcoins when there is excessive demand from the market. I would call it a “rational bubble” similar to what happens in real estate markets, because the rise in prices is not caused by traders’ irrational behavior.

I suspect bitcoin is the typical instrument where at some point small, unprotected investors get caught and bear the big cost of a Ponzi scheme type of event. This could happen if the current liquidity in the bitcoin market vanishes. Big financial institutions would not come to the rescue. Banks don’t speculate with currencies, especially now that they are heavily regulated. And they will only enter into the bitcoin market once it is sanctioned by central banks and regulators, something that is unlikely to happen.

Do you see bitcoin posing any threat to the economy or traditional currencies?

Arturo Bris: An economy can adjust naturally to a new currency. We saw that in 2001 with the Euro. As with traditional currencies, certainly bitcoin—if successful—will hurt the weaker currencies the most. I doubt it will challenge the dominant position of the dollar, the euro or the yen.

Is bitcoin an ideal currency for illegal activity?

Arturo Bris: Quite the opposite. The ultimate owner of any single unit of bitcoin can be tracked through a central system, and any transaction is automatically recorded. This does not happen with traditional money.

Why has bitcoin grown in popularity and acceptance?

Arturo Bris: Consumers do not trust financial markets. There was a need to find innovative solutions to serve their financial needs.

Arturo Bris is Professor of Finance at IMD and directs the IMD World Competitiveness Center.

On October 2, IMD will host an event entitled “Bitcoin: Boom or Bust” featuring a debate between Arturo Bris and “Bitcoin Jesus” Roger Ver, the controversial millionaire bitcoin investor.