Final Thoughts on Bitcoin

There have been endless articles written to debate the investment merits and the value of bitcoin and other cryptocurrencies, so I will not focus on the investment aspect; instead, it seems to me that the geo-political risks of cryptocurrencies have been overlooked and these risks could prove to be more significant than whether bitcoin’s value is zero or something other than zero.

For something to have intrinsic value, it needs to serve a purpose by solving a problem or filling a need. Blockchain has the potential to provide significant increases in efficiencies and security in a wide variety of transactions across many industries – I can see value in that technology, even though it is in its infancy. Bitcoin’s usefulness is a matter of opinion but one prevalent use has been to act as an anonymous medium of exchange outside of regular financial channels, which is very appealing for nefarious purposes. 

It is a known fact that bitcoin and other even more anonymous cryptocurrencies have been embraced by money launders and rogue nations as a method to circumvent laws and sanctions. We also know that national law enforcement, intelligence agencies and governments commit massive resources in battling this illegal trade; therefore, it is not far-fetched to assume that western governments and their intelligence agencies have a significant interest in cryptocurrencies. 

At what end of the spectrum could these interests lie? Could governments want to control cryptocurrencies by regulating exchanges, or could governments want to undermine the public’s trust in cryptocurrencies thereby killing the demand and causing the price to plummet?

North Korea has been very active in hacking global financial systems and they have been linked to the hacking of the SWIFT system and the New York Federal Reserve Bank and the Central Bank of Bangladesh. They have also targeted many cryptocurrency exchanges over the past year, some more than once, to steal large amounts of Bitcoins. The international community is increasingly imposing stricter economic sanctions on North Korea. Could this include an alliance of governments working to undermine bitcoin with the aim to plummet the value of the bitcoins that North Korea holds? 

What if there is a coordinated effort by numerous governments and they are successful in regulating and controlling major cryptocurrency exchanges? What could that do to their value? Achieving this would also allow governments to tax profits and possibly transactions on these exchanges.

What if the security of cryptocurrencies is called into question by either discovering a flaw in the programming or suffering a major hack outside of an exchange? Would it be inconceivable that their value could vanish instantly? Nothing is absolutely secure and given the regular announcements of new discoveries of security vulnerabilities in Windows software and electronic devices, it’s only a matter of time until the blockchain technology will have its Achilles heel(s) exposed.

These are just a few risks and questions that come to mind when thinking about the motives of governments; combined with the significant investment risks, it seems like playing the lottery may be a safer bet and with a higher potential payout. Cryptocurrencies will be a painful financial lesson for many.

Written by:

Scott Eicher, CFA, CFP
Portfolio Manager