Close Menu
TechCentralTechCentral

    Subscribe to the newsletter

    Get the best South African technology news and analysis delivered to your e-mail inbox every morning.

    Facebook X (Twitter) YouTube LinkedIn
    WhatsApp Facebook X (Twitter) LinkedIn YouTube
    TechCentralTechCentral
    • News

      Listed: All the MVNOs in South Africa – 2025 edition

      19 June 2025

      TCS | Tech, townships and tenacity: Spar’s plan to win with Spar2U

      19 June 2025

      WhatsApp founders hated ads – Meta is adding them anyway

      19 June 2025

      China’s car factories run cold as price war masks deep overcapacity

      19 June 2025

      Yellow Card, Visa in deal to hasten stablecoin uptake in Africa

      19 June 2025
    • World

      Watch | Starship rocket explodes in setback to Musk’s Mars mission

      19 June 2025

      Trump Mobile dials into politics, profit and patriarchy

      17 June 2025

      Samsung plots health data hub to link users and doctors in real time

      17 June 2025

      Beijing’s chip champions blacklisted by Taiwan

      16 June 2025

      China is behind in AI chips – but for how much longer?

      13 June 2025
    • In-depth

      Meta bets $72-billion on AI – and investors love it

      17 June 2025

      MultiChoice may unbundle SuperSport from DStv

      12 June 2025

      Grok promised bias-free chat. Then came the edits

      2 June 2025

      Digital fortress: We go inside JB5, Teraco’s giant new AI-ready data centre

      30 May 2025

      Sam Altman and Jony Ive’s big bet to out-Apple Apple

      22 May 2025
    • TCS

      TCS+ | AfriGIS’s Helen Hulett on how tech can help resolve South Africa’s water crisis

      18 June 2025

      TechCentral Nexus S0E2: South Africa’s digital battlefield

      16 June 2025

      TechCentral Nexus S0E1: Starlink, BEE and a new leader at Vodacom

      8 June 2025

      TCS+ | The future of mobile money, with MTN’s Kagiso Mothibi

      6 June 2025

      TCS+ | AI is more than hype: Workday execs unpack real human impact

      4 June 2025
    • Opinion

      South Africa pioneered drone laws a decade ago – now it must catch up

      17 June 2025

      AI and the future of ICT distribution

      16 June 2025

      Singapore soared – why can’t we? Lessons South Africa refuses to learn

      13 June 2025

      Beyond the box: why IT distribution depends on real partnerships

      2 June 2025

      South Africa’s next crisis? Being offline in an AI-driven world

      2 June 2025
    • Company Hubs
      • Africa Data Centres
      • AfriGIS
      • Altron Digital Business
      • Altron Document Solutions
      • Altron Group
      • Arctic Wolf
      • AvertITD
      • Braintree
      • CallMiner
      • CYBER1 Solutions
      • Digicloud Africa
      • Digimune
      • Domains.co.za
      • ESET
      • Euphoria Telecom
      • Incredible Business
      • iONLINE
      • Iris Network Systems
      • LSD Open
      • NEC XON
      • Network Platforms
      • Next DLP
      • Ovations
      • Paracon
      • Paratus
      • Q-KON
      • SevenC
      • SkyWire
      • Solid8 Technologies
      • Telit Cinterion
      • Tenable
      • Vertiv
      • Videri Digital
      • Wipro
      • Workday
    • Sections
      • AI and machine learning
      • Banking
      • Broadcasting and Media
      • Cloud services
      • Contact centres and CX
      • Cryptocurrencies
      • Education and skills
      • Electronics and hardware
      • Energy and sustainability
      • Enterprise software
      • Fintech
      • Information security
      • Internet and connectivity
      • Internet of Things
      • Investment
      • IT services
      • Lifestyle
      • Motoring
      • Public sector
      • Retail and e-commerce
      • Science
      • SMEs and start-ups
      • Social media
      • Talent and leadership
      • Telecoms
    • Events
    • Advertise
    TechCentralTechCentral
    Home » In-depth » Why the bitcoin party could end in tears

    Why the bitcoin party could end in tears

    By The Conversation6 December 2017
    Twitter LinkedIn Facebook WhatsApp Email Telegram Copy Link
    News Alerts
    WhatsApp

    With the price of bitcoin reaching record highs of more than US$12 000, more and more ordinary people consider investing in the cryptocurrency. The recent price surge, however, comes with tremendous risks. Investors should be prepared for the possibility that they could lose their entire investment.

    Bitcoin was launched in 2008 by an anonymous author under the name of Satoshi Nakamoto as a means of transacting among participants without the need for intermediaries. Since the beginning of this year, the price of bitcoin has increased by more than 1 300% as more and more consumers flock to it hoping to profit off its increasing popularity and the associated increase in value.

    Cryptocurrencies are not currencies at all. As the Financial Times explains, bitcoin is a string of computer codes which means that new bitcoins can be created — up to an agreed limit — by computers that gain the right to do so by solving complex puzzles. Transactions are recorded in a database called a blockchain.

    The South African Reserve Bank has expressed its openness to blockchain technologies. But it has also highlighted potential risks to consumers

    Bitcoin, like other assets like gold, doesn’t yield income. You have to sell it to realise any value. And, like gold and other currencies, it can be transferred peer to peer.

    Part of the nervousness about bitcoin is that, along with other cyptocurrencies, it challenges the traditional role of banks and central banks. In the classical world, banks act as intermediaries by providing loans out of the deposits they took and from funding from the central bank. The central bank uses the rate at which it provides this funding as a lever to ensure price stability. The introduction of cryptocurrencies threatens this model because banks are no longer necessary to intermediate funds and there is no central bank to ensure that prices are stable.

    The more immediate fears about bitcoin centre on the recent dramatic rise in its value. There’s nervousness in the market that a flash crash might be imminent after the cryptocurrency tumble by more than $1 300 in minutes on the bitcoin exchange Bitfinex. It did recover to levels above $12 400 on Wednesday.

    The flash crash echoes longstanding warnings that the bitcoin party is set to end in tears. Most recently Jamie Dimon, CEO of JPMorgan, one of the world’s largest investment banks declared that he would fire any employee trading bitcoin for being stupid.

    Stiglitz

    In a highly unusual alliance, his words were echoed by economics Nobel laureate Joseph Stiglitz, who has gone even further arguing that bitcoin ought to be outlawed.

    All of these are clear warning signs that the professionals do not trust the lofty promises of crypto enthusiasts.

    There is no doubt that bitcoin — and in particular blockchain, the technology behind it — has the potential to revolutionise the financial services industry.

    A blockchain functions as a transparent and incorruptible digital ledger of economic transactions, recorded in chronological order, that operates on a peer-to-peer network.

    Fundamentally, the technology allows exchange of value to occur in an environment of peers with conflicting interests without the need for trusted intermediaries. That, in effect, wipes out the need for banks or financial services companies which fulfil this role.

    The use of the technology is not limited to financial transactions. Virtually anything of value can be traded on a blockchain.

    No matter how useful the underlying blockchain technology is, or how widely it can be applied, there are real and substantial risks involved in bitcoin

    But no matter how useful the underlying blockchain technology is, or how widely it can be applied, there are real and substantial risks involved in bitcoin.

    The first, and most significant risk is that compared to any currency, share, or gold, bitcoin is extremely volatile. The volatility of bitcoin to the US dollar is almost six times the volatility of the rand to dollar. While this is great in good times, it is potentially devastating for investors in bad times.

    When professional investors decide on which assets to hold, they look at both the return and the volatility of the asset. Only investors with a healthy appetite for risk are willing to invest in risky, volatile assets. Usually these are finance professionals, for example in large investment banks or hedge funds.

    Investors with a lower risk appetite, such as asset managers or pension funds, prefer assets with a somewhat lower return, but which are less volatile.

    The rule of thumb is that the sophistication of an investor increases with the volatility of the asset she invests in. But with bitcoin this rule of thumb doesn’t hold true. More and more private investors have been flocking to bitcoin “exchanges” that have sprung up all over the Internet and that are aggressively advertised on social media.

    There is a huge risk that bitcoin is already overvalued.

    The practical use cases for bitcoin are limited. It doesn’t enable enough transactions to take place per second to be used as a replacement for a modern payment system. And it doesn’t offer any functionality other than pseudonymous transactions — transactions where the true identity of the counterparties is hidden.

    Bitcoin is favoured by pyramid schemes, including the infamous MMM scheme in Nigeria. In a recent article, the Financial Times called bitcoin itself a pyramid scheme, much to the dismay of crypto enthusiasts. (A pyramid scheme is usually an illegal operation in which participants pay to join and profit mainly from payments made by subsequent participants. If no new people come in, it collapses.)

    Regulatory risk

    The third and possibly biggest risk is regulatory. In September 2017, the Chinese government outlawed bitcoin exchanges in mainland China, sending the price of bitcoin tumbling.

    Despite the claim that bitcoin is a “global currency”, the reality is that 58% of all bitcoin mining happens in China. If at any point the Chinese government should decide to make bitcoin mining illegal, the price is likely to plunge into oblivion.

    Other countries have also voiced concern. The Russian Central Bank recently issued a warning to investors on the risks of investing in cryptocurrencies, citing concerns about a bubble. This suggests that there might be a concerted crackdown.

    Social media is alive with stories about friends of neighbours or distant cousins who have made a lot of money through bitcoin

    Cryptocurrencies are banned in India as their use is a violation of foreign exchange rules. The Australian Reserve Bank has taken a different approach. It monitors the cryptocurrency market in a bid understand the underlying technology.

    The South African Reserve Bank has expressed its openness to blockchain technologies. But it has also highlighted potential risks to consumers.

    There are real risks that many consumers investing in cryptocurrency don’t fully understand. Advertisements promise that bitcoin can make you rich fast. And social media is alive with stories about friends of neighbours or distant cousins who have made a lot of money through bitcoin.

    Without a doubt, these cases are real, and those who invested early can reap large benefits. But this is true in every bubble — from the dot-com bubble to the tulip mania. It’s also true in every pyramid scheme.

    As always, investors should be extremely wary with any scheme that promises quick returns.The Conversation

    • Written by Co-Pierre Georg, senior lecturer, African Institute for Financial Markets and Risk Management, and director, UCT Financial Innovation Lab, University of Cape Town, and Qobolwakhe Dube, PhD candidate at UCT
    • This article was originally published on The Conversation


    Bitcoin Co-Pierre Georg Qobolwakhe Dube top
    Subscribe to TechCentral Subscribe to TechCentral
    Share. Facebook Twitter LinkedIn WhatsApp Telegram Email Copy Link
    Previous ArticleTravelstart buys Cape Town’s SafariNow
    Next Article Backspace: ‘Bubble trouble’

    Related Posts

    Bitcoin smashes R2-million mark in record-breaking rally

    22 May 2025

    Trump tariffs are now slamming crypto

    7 April 2025

    How stablecoins could unlock trade in South Africa

    1 April 2025
    Company News

    Doing more with less: Altron and Microsoft to show the way forward

    19 June 2025

    Why parents choose CambriLearn for online education

    19 June 2025

    Disrupt first, ask questions later – the uncomfortable truth about incident response

    18 June 2025
    Opinion

    South Africa pioneered drone laws a decade ago – now it must catch up

    17 June 2025

    AI and the future of ICT distribution

    16 June 2025

    Singapore soared – why can’t we? Lessons South Africa refuses to learn

    13 June 2025

    Subscribe to Updates

    Get the best South African technology news and analysis delivered to your e-mail inbox every morning.

    © 2009 - 2025 NewsCentral Media

    Type above and press Enter to search. Press Esc to cancel.