On Thursday November 2nd, Bitcoin crossed for the first time the bar of 7,000 dollars. The virtual currency had reached $5,000 last month and was still worth $1,000 in December 2016. These last days, the price of the volatile digital currency has been supported by CME Group’s projects, a world's leading derivatives broker, to launch futures contracts on bitcoin.
                  “Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract”
Terry Duffy, CME Group chairman and CEO, said in a statement (1).
The leading global exchange for options and futures trading is the latest entrant into the business of offering derivatives for bitcoin, which is not listed on a major exchange. The growth of bitcoin derivatives is also another step towards the development of the digital currency as a more established asset class.

Since the beginning of the year, bitcoin has appreciated more than 600%. At its launch in February 2009, a bitcoin cost just a few cents. Today, a single unit of the virtual currency is worth more than three times the price of an ounce of gold. Some bitcoin evangelists see it climb much higher in the coming years.
​
But such an appreciation is subject to many criticisms from both banking groups and States. Among others, JPMorgan Chase CEO Jamie Dimon described the currency as a fraud, adding that he thought it was “stupid” and a “great product” for crooks. (2) According to him, there will be no currency that gets arounds regulatory control.

​The technology will be used, but authorities will not tolerate the bitcoin development eternally. Some countries already showed a strong resistance to bitcoin, China for example, which has just forced foreign exchange platforms to close, concerned by capital flight and tax evasion. However, this skepticism has not prevented other countries like Japan from recognizing bitcoin and other cryptographic currencies as legal means of payment.

Is bitcoin currently the biggest cryptocurrency bubble in the world, or a very good investment bet at the forefront of new-age financial technology? According to Kenneth Rogoff - Professor of Economics and Political Science at Harvard University
                  “the long run the technology will develop, but the price of bitcoin will fall apart” (3)
What will happen next depends, in large part, on how governments react. Will they tolerate anonymous payment systems that facilitate tax evasion and crime? Will they create their own digital currencies? Another key question is how successful are the many bitcoin competitors in the market?

Today, the value of bitcoin and competing products is based on the relative anonymity of the transactions it authorizes. When States will strengthen the surveillance - or create their own digital currency - this advantage disappears. In principle, it is extremely easy to clone or improve bitcoin technology. Less simple is to duplicate undisputed leadership position reached by bitcoin in terms of credibility and large ecosystem of applications built around it. In Silicon Valley, aware executives are increasing investments in cryptocurrencies. However, the most important competitor is the Ethereum. Its large-scale ambition, comparable to that of Amazon, consists of allowing its users to use the blockchain technology to negotiate and conclude "smart contracts". At the beginning of October, Ethereum's market capitalization was $28 bn, compared to $72 bn for bitcoin. Ripple, a platform supported by the banking sector to reduce transaction costs for interbank and overseas transfers, ranks way behind at $9 bn. Behind the top three are dozens of new competitors.

Most experts agree that the ingenious technology behind virtual currencies can have wide applications in the field of cybersecurity, which raises one of the biggest challenges against the stability of the global financial system. For many developers, the goal of getting a cheaper and more secure payment mechanism has supplanted Bitcoin ambition to replace dollars. But it is unreasonable to think that bitcoin will be allowed to supplant a currency issued by a central bank. Large-scale anonymous transactions are guaranteed with virtual currencies only, although it could make extremely difficult to collect taxes or control criminal activity.

It will be interesting to see how the Japanese experience will evolve, for instance. The Prime Minister Shinzo Abe has declared to monitor bitcoin exchanges to be on the lookout for criminal activity and to collect information on deposit holders. Nevertheless, we can be certain that global tax evasion will look for ways to acquire bitcoins anonymously abroad and then launder money through Japanese accounts. By adopting virtual currencies, Japan risks becoming a tax haven comparable to Switzerland. If bitcoin is stripped of its near anonymity, it may be difficult to justify the current price. Will it fall to zero if governments become able to fully observe transactions? Maybe not. Even if bitcoin transactions require an exorbitant amount of electricity, with some improvements, bitcoin could still beat the 2% of big bank charges on credit and debit cards.
​
Finally, it is hard to see what can prevent central banks from creating their own digital currencies and using regulation to tip the balance in their favor until they win the game. The long history of the currencies tells us that what the private sector does innovate, the State ends up regulating and appropriating it. The price that bitcoin in the next two years is unpredictable, but there is no reason to expect the virtual money to avoid a similar fate.

Célia Bellec
 

(1) CNBC, Evelyn Cheng, Bitcoin surges to record above $6,400 after CME announces launch of futures for digital currency, Tue, 31 Oct 2017 
(2) Fortune, Aaron Pressman, JPMorgan CEO Dimon Violates His Bitcoin Vow After Just One Day, October 13, 2017
(3) Les Echos, Kenneth Rogoff, La chronique de Kenneth Rogoff, Tue, 31 Oct 2017