Bitcoin has all the hallmarks of a classic speculative bubble and even after almost halving in value in a matter of weeks it still has further to fall, according to a leading team of economists.

As regulators in South Korea again signalled on Thursday that they were considering a ban on cryptocurrency exchanges, Capital Economics also dismissed claims that bitcoin and its imitators could replace established currencies as “rubbish”.

Bitcoin, which rose to more than $19,000 in December, recovered by 18% on Thursday after suffering heavy losses in the preceding two days.

Its value was sitting at $11,560 on the Luxembourg-based Bitstamp exchange shortly after 2am GMT. Other cryptocurrencies include Ethereum and Ripple.

Q&A What is bitcoin? Show Bitcoin is the first, and the biggest, 'cryptocurrency' – a decentralised tradeable digital asset. The lack of any central authority oversight is one of the attraction. Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions - as well as the oversight and regulation that entails. This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person. The exchange rate has been volatile, making it a risky investment. Whether it is a bad investment is yet to be seen. In practice it has been far more important for the dark economy than it has for most legitimate uses, but with Facebook's announcement that it is launching a new digital currency - Libra - mainstream interest in bitcoin has surged.



The currency’s volatility has alarmed regulators around the world and suggestions that it could be banned triggered the latest falls.

Capital’s research note says the latest price falls “suggest that the bubble is bursting” although because the price was still ten times higher than it was a year ago, it still had a long way to fall.

Part of the problem, Capital says, is that despite the claims that cryptocurrencies could replace dollars and pounds one day, the surge in the price was not being driven by any strategic world view but more a simple belief that they will continue to rise in value.

“Most people are buying Bitcoin, not because of a belief in its future as a global currency, but because they expect it to rise in value,” the note says.

“Accordingly, it has all the hallmarks of a classic speculative bubble, which we expect to burst. Triggers for the bubble to burst could be a further crackdown by regulators or a major hacking attempt.

“When it will fully burst is anyone’s guess and prices could yet rise again, before they fall further ahead,” they added.

The Capital team, led by London-based Vicky Redwood and Kerrie Walsh, argue that even if the bubble does burst it should not have too great an impact on the global economy because the amount of money invested in cryptocurrencies is still relatively small and they are not held by institutions.

In South Korea, which accounts for up to 15% of daily Bitcoin trading, the chief financial regulator chief told MPs in Seoul on Thursday that the government was considering shutting down all local virtual currency exchanges, days after the idea was raised by the country’s justice minister.



“The government is considering both shutting down all local virtual currency exchanges or just the ones who have been violating the law,” said Choi Jong-ku, chief of financial services commission.

The Russian and Chinese governments have also hinted at similar moves.

However, even if trading in the currencies is outlawed, Capital acknowledges that the blockchain technology behind the phenomenon will have a lasting impact.



“Not only could it transform the financial system – by removing the need for banks to act as intermediaries – but it could have applications elsewhere, for example, in maintaining tax and hospital records. A particularly interesting element is smart contracts, which could transform supply chains and trade finance.”

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