Bitcoin investors hoping to make billions may end up with a sack of fool’s gold

The cryptocurrency may not be a threat to the world economy, but that should not stop regulators from protecting investors from it

Sifting the Yukon river for gold was a waste of time for most of the 100,000 prospectors seeking to make themselves rich in the 1890s. The same can be said of the bitcoin miners who dream of striking it rich by getting their hands on some of the extremely lucrative and painfully elusive electronic currency.

Relatively few people have managed to decipher the codes needed to extract bitcoins from the 21 million locked inside the mathematical problems set by its creator, the software engineer whose true identity is unknown but who goes by the name Satoshi Nakamoto.

Business Today: sign up for a morning shot of financial news
Read more
Those who have employed enough computer power and code-cracking know-how can consider themselves rich now that the value of one bitcoin has soared from $753 last December to around $10,000. The rest have deployed huge amounts of energy and time for no return.

Should anyone be worried about this turn of events? Or will it go down as a moment in history when an asset was mined, some people got rich and ... that was it?

The ambitions of the bitcoin community mean the creation of a new currency must be taken more seriously. Its stellar rise in the last 18 months is likely to have sucked in thousands of speculators, many of them ordinary investors.

And with mainstream financial exchanges looking to host bitcoin as a tradeable asset, or list derivatives of bitcoin on their trading boards, thousands more will be sucked in over the next 18 months.

Where ordinary investors, hunting in large numbers, seek a return on their savings in a high-risk environment, governments are usually minded to regulate.

The idea behind bitcoin was that it should be like any commodity that, once discovered, became increasingly difficult to extract. Like gold, it would become a store of value and make those clever enough to find it and believe in it very rich.

The distributed ledger designed to make each bitcoin account secure and accountable without the need for third parties, like banks, to be involved became for many participants a potential template for all future deposit saving and trading.

Advertisement

To that end, it was also viewed as a replacement currency to the dollar, euro or pound – one that could not be manipulated by central banks, which are only too keen to print extra notes, and thereby devalue the currency, in times of trouble. It is a seductive package that has led many in the banking industry – those most under threat – to call it a fraud.

Goldman Sachs boss Lloyd Blankfein said so last week, adding his voice to JP Morgan’s Jamie Dimon.

Dimon described it as fraud that would ultimately blow up and said the desire to hide funds from regulators and the police meant it was only fit for use by drug dealers, murderers and people living in places such as North Korea. Blankfein was more concerned that its volatile price, which dropped 20% in less than 24 hours after topping $11,000 last week, disqualified it from being a sensible currency.

Sir Jon Cunliffe, a deputy governor of the Bank of England, summed up the view of many in the City when he said calmly that bitcoin was a sideshow and too small to pose a systemic threat to the global economy.

To cover his flank against accusations that the Bank, which is the UK’s chief financial regulator, was too dismissive of the issue, he also cautioned that bitcoin investors needed “to do their homework”.

No doubt all bitcoin investors think they have done their homework. And regulators probably think they have enough work to do. But while it is easy to say that a fool and their money are soon parted, anyone who interacts with the financial services industry is a potential victim. And, with this in mind, regulators should be ready to impose all the usual tools of misselling rules and compensation schemes on this freshly minted industry.

At the moment, bitcoin is having a free ride. The tipping point is close. Regulators should be prepared.

Grayling mustn’t shunt true cost of rail network into the sidings
Advertisement

Another private operator on the east coast mainline, another bailout. History is repeating itself – again – and Chris Grayling is in the middle of the farce.

The transport secretary’s efforts to drum up a narrative of reversing Beeching cuts could not eventually conceal the small print in his rail strategy: a shabby face-saving deal with Stagecoach and Virgin, two firms who have richly profited from privatisation. Their Virgin Trains East Coast joint venture is to be curtailed, meaning that billions promised to the taxpayer by private-sector firms have again proved to be notional.

The government was in an invidious position: a delay to infrastructure upgrades by Network Rail and the shaky entry into service of Hitachi trains commissioned by the Department for Transport certainly gave the operators cause for complaint. Yet it will appear once again that private firms expect the downside to lie with the taxpayer.

Stagecoach/Virgin has a rich history of getting its way with the DfT, notably during the 2012 west coast franchise debacle, where it wrested back control of the contract from First Group. Since then, soul-searching reports have concluded that franchising does, indeed, work – but evidence has also accumulated to the contrary.

Competition has all but vanished: both parties in that west coast fiasco have been allowed to hang on to large franchises well into the next decade. The Thameslink megafranchise has turned Govia, which previously ran Southern services without much mishap, into a basket case. National Express has turned its back on rail and Stagecoach’s shares rocketed once news sank in that it was exiting East Coast early.

What franchising does offer the government is the fig-leaf of privately owned railways, even as it effectively dictates whether guards stay on trains, and by how much fares should rise.

Taking the flak directly, from commuters or unions, would not be for the fainthearted: Labour’s pledge to renationalise, slowly, is pragmatic. Yet an honest conversation about the true costs of the rail network, and who does and should invest, is long overdue. Grayling’s latest sleight of hand shows it is unlikely to be forthcoming soon.

No, Jeremy Corbyn – banker baiting’s bad for business
Advertisement

Picking a fight with a banker is still a good sport, 10 years after Northern Rock collapsed. Jeremy Corbyn knows it will provoke his supporters to chant his name to the tune of the White Stripes song Seven Nation Army once again. He knows it will earn the cheers of many beyond Labour’s membership ranks.

So there is probably little shock value in his response to Morgan Stanley last week after the US investment bank’s analysis that a Corbyn government would be bad for its clients and investors more generally. However, a prime-minister-in-waiting might want to be more circumspect about revolutionising an industry that accounts for more than 10% of GDP and makes a huge contribution to improving the UK’s balance of payments.

It’s an uncomfortable truth that Britain would find life difficult without the foreign banks in the Square Mile. Careful reforms are needed, not knee-jerk reactions.