Banking group sceptical about bitcoin's future, calling currency 'inherently fragile'

Market dominated by speculators rather than users, making price volatile, report says

PUBLISHED : Friday, 10 January, 2014, 3:41pm
UPDATED : Friday, 10 January, 2014, 3:41pm

The online currency bitcoin has shown unexpected success, but its future as a broadly accepted exchange medium is limited, according to a report by a global banking group Thursday.

The report by the International Institute of Finance, which represents more than 450 banks and financial institutions, said more regulation of bitcoin exchanges and transactions could strengthen its legitimacy among consumers and ease regulators’ doubts about it.

But for the moment, the IIF report said, bitcoin faces significant resistance in countries like China.

And because most of the market is dominated by speculators rather than users, bitcoin’s value in other currencies is particularly volatile.

In a market worth about US$12 billion, the IIF said, “It is estimated that 50 to upwards of 90 per cent of bitcoin owners are speculators – thereby contributing to the substantial price fluctuations seen recently.”

It pointed to the sharp fall of bitcoin from a high of US$1,240 to US$576 in just three days last month after China banned its financial institutions from using the currency.

Since then bitcoin has rebounded, topping US$1,000 earlier this week before falling to US$915 on Thursday.

“If it persists, this remarkably high volatility will compromise bitcoin’s capacity to function as a medium of exchange, as it deters most large companies from accepting the digital currency as a form of payment,” the IIF report said.

Unlike other currencies, bitcoin does not have the backing of a central bank or government. Instead, the units are generated by a complex computer algorithm designed by one or more anonymous people in 2009.

Because of that, said the report, its functionality and ultimate success “is determined by programmers – and their goodwill is taken for granted”.

Thus the IIF characterised bitcoin as effectively a “fiduciary currency” with no intrinsic value of its own and dependent on trust that it can be exchanged for a more common currency like the dollar. That makes it “inherently fragile”, the IIF said.

“Despite bitcoin’s ‘ingenious features’, it cannot provide a currency of stable value, and its use as a broadly accepted medium of exchange appears limited,” the report concluded.