Bitcoin headed for a 'spectacular collapse'

Investing in bitcoin is “incredibly dangerous and very speculative”, warns Magellan’s Hamish Douglass, but the technology underpinning it could be “revolutionary”.

Speaking at Magellan's Sydney road show on Wednesday (20 September), chief executive Hamish Douglass took aim at the world's most talked-about crytocurrency, bitcoin.

The value of bitcoin has appreciated from just under US$1,000 at the beginning of 2017 to US$3,860 on Wednesday afternoon, down from an all-time high of US$4,683.87 on 31 August 2017.

JP Morgan chief executive Jamie Dimon recently said that bitcoin is "worse than tulip bulbs" (referring to the 1630s asset price bubble in Holland) and threatened to fire traders from his bank who were caught trading the cryptocurrency.

Mr Douglass pointed to the structure of the market, which mandates that there will be a finite supply of bitcoins — specifically, no more than 21 million.

At present, there are just under 12.5 million bitcoins in circulation. However, it is getting harder and harder for miners to produce additional bitcoins, Mr Douglass said.

"Every time a [bitcoin] transaction is completed, a new chain gets created, and this has to get confirmed by the bitcoin 'miners'," the chief executive said.

"These miners actually get rewarded by being issued new bitcoins. So, there's a strong incentive system to be issued more bitcoins, and as more people do this and want to speculate on it, the currency becomes more valuable."

He added: "People are putting computer farms near nuclear power plants at the moment to do this mining in China.

"I don't know what happens once you remove that incentive [to mine bitcoins]. Once you've removed the incentive for people to effectively get more bitcoins through the chain, what happens at the end of the period?

"I think it could be a spectacular collapse... I think that's a very very major risk.

"But, of course, everyone's inventing the next cryptocurrency, so the crowd will just dump bitcoin and move onto the next one."

However, the technology behind bitcoin — namely, blockchain or the "distributed ledger" — has the potential to be "revolutionary" for financial markets, Mr Douglass said.

Specifically, if central banks around the world move to a blockchain-based system for verifying transactions, it could cut private bankers out of the transaction process.

"That would mean transactions can be verified automatically and you wouldn't need any involvement of banks, so it could be very disruptive to their core functions," the chief executive said.

"So, I think if you're investing in bitcoin, it's incredibly dangerous and very speculative, but the underlying technology could be revolutionary."

[Related: Focus on cyber security from the start]

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