Bitcoin and Cryptocurrencies: Legitimacy or Simply a Bubble Set to Burst?

January 2nd, 2018

Cryptocurrencies are the new kid on the block in the U.S., specifically Bitcoin, which experienced incredible stock price growth in 2017. It’s hard to avoid seeing Bitcoin in the news nowadays. Bitcoin, like all other cryptocurrencies, is a decentralized (therefore not verified or backed by any banks or government entity) peer-to-peer payment network in which “miners” (i.e., independent individuals and companies who own the governing computing power in the Bitcoin network) “regulate” the network (i.e., enforcing the credibility or maintaining a fixed amount of Bitcoins circulating in the network). However, despite its massive growth over the past year or so, this market shouldn’t present worthwhile opportunities to the accounts receivable management (ARM) industry due to a number of factors, most notably: significant growth risks and fluctuations, and impending regulatory actions.

Bitcoins and hundreds of other cryptocurrencies are traded on platforms, similar to the NASDAQ or NYSE, generating transaction fee revenue for the miners and network administers. Currently, there are only about 21 million Bitcoins available, creating a scarcity in the market that drives higher prices – one Bitcoin is worth more than $14,000 as of December 2017, as shown by the graph below, from a matter of cents back in 2010. The growth has been so rapid and intense since 2010 that we couldn’t even fit the entire trend on a graph while properly illustrating the full price fluctuations in 2017. More importantly, this graph illustrates the massive drops that may occur in the Bitcoin market, as we saw earlier in December, when the price of a Bitcoin fell by about $5,000 – nearly 30% – in a matter of days.

As alluded to previously, Bitcoin’s price (as it translates to USD) was relatively insignificant for the vast majority since its inception in 2010. One Bitcoin wasn’t worth more than $100 for a continual basis until late-2013 – three years after its inception. Since 2013, Bitcoin’s price has fluctuated wildly, ranging from roughly $750 around this time last year, to over $14,000 today. This massive two-year spike, most notably over the past 12 months, raised concerns throughout the economy due to its unregulated nature and experts, such as JPMorgan Chase’s CEO, Jamie Dimon, denouncing it.

Since Bitcoin is not backed by a centralized government, its entire value is entirely based on public perception. This creates incredible risk. Investors and transactors around the world are betting Bitcoin will be recognized as a legitimate, government-backed, global currency. If its price were to plummet to $0, for example, investors and transactors would lose the “real” money they used to buy Bitcoins (e.g., USD, RMB, and EURO). Alternatively, some experts believe Bitcoin’s value, even during a financial crisis, is more stable than government-backed currency because it’s not connected to a specific economy (i.e., shocks to the U.S. or China shouldn’t affect Bitcoin pricing).

Bitcoin poses a lot of questions for regulators. Because Bitcoin owners can “hide their money” to make anonymous payments, avoid taxes, or simply avoid regulatory monitors by buying Bitcoins, regulators and government entities are rushing to figure out what to do. For example, does the government have the right to dictate recognition and/or acceptance of non-government-backed currency? Should a currency-competition system be allowed? Nonetheless, it’s safe to assume that there’ll be significant regulatory changes targeting the Bitcoin market in the near future by various international governments.

Due to the number of debates deriving from the Bitcoin market with regard to its fluctuations and surrounding (lack of) regulations, there may be various significant impacts on the ARM industry. On the one hand, it may be used illegally to evade taxes, among other debts, thus lowering the amount of potential receivables upon which an ARM specialist may collect. On the other hand, however, Bitcoin may become an asset to the ARM industry if it’s eventually regulated and verified by more legitimate entities (e.g., state-backed governments), thus requiring financial institutions and businesses to retain significant outsourced infrastructure and IT or compliance services (e.g., more complex payment processing standards and maintaining of operational compliance). As we know, ARM companies retain highly advanced technological software and platforms, and are already faced with increased regulatory specializations, so there may be a more seamless transition into the new, growing industry if it’s substantiated in the future. Most likely, however, many experts believe that Bitcoin and other cryptocurrencies will simply transition into a financial trading instrument, at best, and a seriously risky investment that will burst at some point, at worst.

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