Long dismissed as a cult phenomenon, digital currencies have gained new respectability in recent months. So much so that cybercurrency champions dream of mainstream acceptance of digital money. But there’s less to the current digital-currency frenzy than appears.

Digital currencies like Bitcoin, the dominant virtual currency, with about 45 per cent of the market, exist only as pixels. They are purchased and traded on digital “exchanges,” and stored in an individual’s digital “wallet.” Transactions are verified and recorded in a digital “ledger” by a decentralized network of computers.

The ledger can be viewed by the public. But good luck understanding what you’re looking at. Each transaction is identified by a one-time-use number, and every wallet is also numerically tagged. A single user can have a multitude of wallets. There are no real-world names and addresses in the “digital currency community.”

Finally, digital currencies are a “peer-to-peer” method of electronic funds transfer, trading and storage. That means there’s an absence of third parties, notably governments, central banks and regulators. And within the decentralized digital-currency world, there are no controlling authorities, an invitation to fractious relations among exchange operators and users.

Pardon that cursory tutorial. But so poorly understood is digital currency eight years after it was invented by one or more still anonymous computer programmers, that even sophisticated hedge-fund managers refuse to deal with it.

For all that, the value of a Bitcoin, the oldest and best-known of the cybercurrencies, set a price record of $2,690 on May 25, up from just $13 in January 2013. The price has since eased back to $2,452. And the total value of digital currencies in use soared to a peak of more than $90 billion late last month, up from only $6 billion just two years ago. (All figures in U.S. dollars.)

Driving the price surge is what appears to be a long-overdue resolution in the digital-currency community to make Bitcoins easier to use. Another boost is Japanese legislation in April allowing Japanese retailers to accept Bitcoin as legal currency.

Most important, on May 26, more than 40 leading banks and other large firms invested $107 million in R3 CEV, a venture to upgrade the so-called “blockchain” that verifies digital transactions. The latest investors in the two-year-old R3 consortium include financial-services heavyweights Barclays PLC, Bank of America Corp., Fidelity Investments and Wells Fargo & Co.

Abby Johnson, CEO of Fidelity, world’s largest mutual-fund company, told an industry conference May 23 that “blockchain technology isn’t just a more efficient way to settle securities [transactions] – it will fundamentally change market structures, and maybe even the architecture of the Internet itself.”

The blockchain was devised in the earliest days of the Bitcoin to prevent counterfeiting and double-counting of digital-currency transactions. With sufficient upgrading, the blockchain does have potential to become one of the world’s most robust systems for authenticating transactions.

The handful of blockchain firms – which operate networks of computer servers that verify cybercurrency transactions – run each digital-currency transaction through 200.5 quintillion numerical tests before accepting it as legitimate.

The appeal to traditional financial institutions of blockchain technology is obvious at a time when cybersecurity concerns have never been so pronounced.

And in that sense, the Bitcoin might yet create a lasting legacy.

Otherwise, though, the staying power of digital currencies themselves is iffy:

• Volatility: Digital currencies are notoriously volatile. This year alone, Bitcoin leapt more than 150 per cent in value to peak, as noted above, at $2,690 on May 25. But within four days, Bitcoin had plunged almost 19 per cent in value, likely on profit-taking.

Back in March, Bitcoin value plunged 18 per cent after the U.S. Securities and Exchange Commission (SEC) rejected a proposal for a Bitcoin exchange traded fund (ETF). That failed bid to bring Bitcoin into the mainstream caused the sudden Bitcoin sell-off and resulting drop in value.

Volatility arises when a commodity is in short supply, which makes it acutely sensitive to every bit of good and bad news.

In Bay Street parlance, digital currencies are thinly traded. There’s so little Bitcoin available to be traded that a sizeable purchase or sale can – and routinely does – send the entire market reeling.

As noted, the total value of digital currency in existence is about $90 billion. But that’s a tiny market, compared with the current U.S. money supply of $3.8 trillion.

The volatility that has always marked cybercurrency trading makes the currency unsuited to financing a merger, a car-loan portfolio, or an emerging market UN humanitarian project.

• Standardization: There are few common standards among the estimated 700 rival digital currencies that Bitcoin has spawned. As noted above, cybercurrency firms in about two dozen countries agreed last month to finally collaborate on common protocols to speed up transactions. But two similar efforts in recent years succumbed to ideological squabbling in the cybercurrency community. Verification of cybercurrency transactions has slowed to a crawl this year, from an average of 17 minutes to more than five hours.

• No backstop: Goldbugs and cybercurrency enthusiasts share a belief that traditional currency – or “fiat” currency, as they call it – is a Ponzi scheme. Governments manipulate the currency they issue, according to the conspiracy. And nothing actually stands behind government-issued currency.

But that’s not true, of course. The U.S. dollar, for instance, is backed by “the full faith and credit of the United States.” That’s an open-ended guarantee to make good on the U.S. dollar’s value, even if America is obliged to sell Yosemite National Park, Rockefeller Center, and the inter-state highway system to honour the nation’s debt obligations.

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In fact, it is Bitcoins and other cybercurrencies that are backed by nothing. They are not backstopped by governments, central banks, or deposit insurance. When Citigroup Inc. came close to insolvency in 2008, it was promptly bailed out by Uncle Sam, and depositors were kept whole. But when Tokyo-based Mt. Gox, then the world’s biggest cybercurrency exchange, went bust in 2014 after being defrauded, there was no one to reimburse Mt. Gox’s holders of an estimated $450-million worth of Bitcoins, a relative few of which were eventually recovered, most of which simply vanished.

And that lawless-frontier ethic is by design. Bitcoin and its ilk are the currencies of the libertarian, whose privacy and freedom from regulators and the state matters more than financial security.

Bottom line: The constantly upgraded blockchain method of authenticating financial transactions shows promise of becoming a pillar of cybersecurity in global finance. And we have the advent of Bitcoin to thank for that. But it’s doubtful that cybercurrencies themselves will ever be ready for prime time.

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