Trading in bitcoin, the popular cryptocurrency generating business headlines around the world, is a bubble set to burst within the next two years, unless it is regulated by governments or central banks, a technology expert told Zawya.

Bitcoin was founded eight years ago by the mysterious creator Satoshi Nakamoto, but it has no physical existence or official regulations and is traded online on a number of websites.

As of last week, 16.7 million bitcoins had been released, with on average of 12.5 new ones released every 10 minutes. The new bitcoin are released by “mining”, a process where a global network of computers competes to solve complex algorithms and are rewarded with a supply of the cryptocurrency, according to a factbox on bitcoins compiled by Reuters earlier this month.

Some investors told Reuters they expect the value of bitcoin to grow to $20,000, up from $10,000 in November. The digital currency launched futures on a U.S. exchange earlier this month after hitting a record high of $17,428.42 last week.

“It (the bitcoin) is a big question mark, I think for everybody. Is it a bubble that is about to burst?” Gregg Petersen, regional sales vice president for the Middle East and Africa at Veeam, a Swiss-based information technology company, told Zawya in a phone interview on Thursday morning.

“If the cryptocurrencie(s) continues to grow as fast as they are, I don’t think you will see them lasting for the next two years at this fast rate, I don’t think this is possible, the bubble will burst before then,” he added.

On the other hand, another technology expert, who spoke on condition of anonymity, told Zawya in an email interview on Thursday afternoon that bitcoin’s major advantage is “the potential returns that can be made even with relatively small investments”.

“The challenge,” he added, “is that a lot of people see cryptocurrencies as a get-rich-quick scheme and invest in them without understanding the nature of the market. As with any investment, understanding is key and as cryptocurrencies are still a little geared towards the technically inclined, this can present a steep learning curve.”

With much debate raging over the issue, here are the reasons Petersen gave for why bitcoin is a bubble that will not last for long, with the counter argument made by the anonymous trader.

1. Return on investment:

Petersen: “You are never going to get anything actually physically tangible in return for your investment. If we compare bitcoin to gold… when you buy something like gold, you buy something that really has a return. The return is gold... When you buy shares on a stock market, you get a share certificate in return and you get shares in a company…When you buy bitcoin, all that you are buying is the demand. You actually get nothing in return for your bitcoins.”

Anonymous technology expert: “Most people buy bitcoin for trading rather than as an alternative to cash.”

2. Volatility:

Petersen: “What is driving bitcoin at the moment is that there is supply for bitcoins and a demand for bitcoins.”

Anonymous technology expert: “Even with its tremendous volatility, bitcoin has over the last year surged significantly and other currencies such as Ethereum too have shown similar trends.” Ethereum is the second-most valuable cryptocurrency after bitcoin.

3. Security:

Petersen: “People have no idea who is responsible for their cryptocurrencies. It could be money launders, gangsters. It could be criminals, you have no idea.”

Anonymous technology expert: “A general rule of thumb when investing, and one which is especially true of cryptocurrency trading, is to never invest more than you are willing to lose. I would say start small, get a sound understanding of the fundamentals and security elements before diving in deeper… I would also highly recommend the use of security layers... Many investors tend to keep their currencies on the exchanges and while cryptocurrencies themselves are extremely secure, these exchanges can and have been hacked resulting in significant losses to their customers.” He advised traders to keep their money offline and use special hardware to secure their transactions.

4. Type and size of investors:

Petersen: “If you look at all the big investors globally, the big investment houses, none of them are investing in bitcoin and it is simply the people who are prepared to take high risk for a high reward and this is the reason why a lot of people think it is potentially a bubble.”

Anonymous technology expert: “The conversion of bitcoin back into fiat currency can be a challenge. In the Middle East, only recently we (have) seen an exchange being established that allows the conversion of local currencies into bitcoin(s) and vice versa. However, at present since such options are limited, this raises a risk- if an exchange were to shut down, people would face difficulties in converting their cryptocurrencies back into fiat currency.”

In the Gulf Cooperation Council region, the Central Bank Governor of the United Arab Emirates last week said that the UAE and Saudi Arabia are working together to issue digital currency that would be accepted in cross-border transactions between the two neighbouring countries, according to Reuters. The UAE and Egypt have launched bitcoin exchanges in August.

Globally, Japan, the United States and South Korea are the biggest bitcoin markets, accounting for 44 percent, 32 percent and 15 percent of the daily global trading respectively, according to a report by the Financial Times.

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(Reporting by Yasmine Saleh; Editing by Shane McGinley)
(Yasmine.saleh@thomsonreuters.com)

© ZAWYA 2017