Bitcoin, blockchain and boom-and-bust economies

The traditional marketmakers are concerned by cryptocurrencies. Should the general public share that sentiment?

Bitcoin steadied after its biggest drop since June as investors and speculators reappraised the outlook for initial coin offerings. Chris Ratcliffe / Bloomberg

Almost 400 years ago, the Netherlands was gripped by an odd form of investment fever. At the peak of the frenzy, which involved the trade of tulips, a city centre house in Amsterdam was sold for 10 flower bulbs, which were worth a small fortune by then. The bubble burst in 1637 and no one really knows why buyers stopped going to market so suddenly, but the pattern at work in 17th century Holland has been repeated in financial markets repeatedly since then - think of the dotcom bubble and the subprime crisis in this century alone.

This week, Jamie Dimon, the chief executive of JPMorgan Chase, has described the cryptocurrency Bitcoin as "worse than tulip bulbs". Bitcoin has offered spectacular returns to investors, with its value rising from less than US$400 in 2015 to around $5,000 at the start of this month. As The National reported, Mr Dimon said: "The currency isn't going to work. You can't have a business where people can invent a currency out of thin air and think that people who are buying it are really smart."

Mr Dimon's comments expose once again the divide that exists between those who believe that cryptocurrencies (and the blockchain technology that underpins them) represent the future and those who don't.

Advocates of Bitcoin transactions say they democratise the financial system, taking power away from the gatekeepers and putting it in the hands of many.

Much of the suspicion that surrounds Bitcoin is fed by the fear that the rise of a decentralised currency could upend a financial system that is controlled by the very few. As if to demonstrate the present-day power of the traditional marketmakers, Mr Dimon's comments sent Bitcoin values tumbling to below $4,000.

This country has an interest in the debate. This week, the Central Bank concluded a review of cryptocurrencies that may bring new regulations. Bitcoin is legal in this country and has seen noticeable recent uptake in the property market. Dubai, meanwhile, aims to be the first blockchain powered government. It says that it stands to unlock billions of dirhams of savings by using the technology. It is hardly an outlier in this respect. The Nasdaq Stock Market uses blockchain to facilitate stock trades of private companies. The London Stock Exchange and the Deutsche Boerse are evaluating its use.

Cryptocurrencies are disruptive and complex by nature and design. They are hard to properly explain, just as you would have been hard pressed to understand tulip mania in the 17th century. Those who seek to find answers about Bitcoin may look to another historical example, this one from the tech industry. Apple shares started trading at $22 in 1980. Today, the company is worth countless times more.

But, over a 30-year history, its share price has, on occasion, ebbed dramatically, descending to $14 in 2002. Bitcoin will need to be judged over the longer term for us to fully comprehend if it is the currency of the future or, as Mr Dimon believes, it is enjoying a brief moment in bloom, like a 17th century tulip.