Bitcoin’s record-breaking surge continued today with the cryptocurrency powering towards $7,700 in early trading.
The current rally began earlier this month, when computer giant IBM announced a joint venture with fintech start-up Stronghold to launch a cryptocurrency called Stronghold USD.
Market still very volatile
IBM’s stamp of approval for the cyber-cash revolution saw traders piling into Bitcoin and rival cryptocurrencies as it seemed that the sector was coming of age.
The IBM move cannot provide the rationale for the whole of the cryptocurrency rally. Writing in Forbes magazine, contributor Peter Tchir suggests alternative explanations including the requirement of knowledge of cryptocurrencies for people studying for accountancy qualifications and growing interest among banks about getting involved in the sector.
However, as the market continued to rally, the European Parliament’s monetary and economic affairs committee warned that holders of Bitcoin and its rivals could be severely affected if commercial banks and even central banks became involved in cryptocurrencies.
A report commissioned by the committee said: “The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors.”
“However, the market power of banks in traditional banking services might be used to limit competition in the cryptocurrency market through pre-emptive acquisitions or predatory pricing schemes.”
Bitcoin may have decisive lead over rivals
That said, “permissioned”, official cryptocurrencies, whether issued by commercial or central banks, would not be able to offer the privacy available through the existing currencies, which may limit their attractiveness. Equally likely is some consolidation among the cryptocurrencies should it become clear that the sector has a tendency towards natural monopoly.
Ironically, given that a key justification for cryptocurrencies is that they will compete in order to maintain their value and thus attract buyers, it is not impossible that Bitcoin’s position is already unassailable. Stronghold USD may be seen as a different sort of asset, given it will be backed by the cash reserves of the American currency, something that applies to none of the existing cryptocurrencies.
Furthermore, it will be pegged to US dollar, in a way reminiscent of the post-war fixed exchange-rate system and the European Exchange Rate Mechanism. How this peg will be maintained should the market push the Stronghold USD’s value powerfully up or down is unclear.