Cryptocurrency values have rocketed on the back of an announcement that computer giant IBM has bought into the cyber-money revolution.
Bitcoin, the best-known of the “cryptos”, saw its value crash through the $7,000 barrier for the first time in more than a month after the announcement.
In its wake, other crypto-currencies were trading at healthy levels, with Ethereum at $502.38, Ripple at $0.5127 and Litecoin at more than $91.38. In a single day, the crypto-currency market gained more than $20 billion reaching nearly $300 billion.
New currency to be backed by dollar reserves
But much of IBM’s cryptocurrency plan remains unclear. The project involves IBM going into partnership with fintech start-up Stronghold to create a new cryptocurrency that will be pegged to the US dollar.
Such a relationship with the American currency would mark a major departure from the practice of Bitcoin and other forms of cyber money. These find their own value on the open market and, while this value is expressed in dollars, there is no formal tie with the US denomination.
This technology has, until now, been the sole guarantor of cryptocurrency value because of its decentralised nature, which means its records are held openly on computers around the world. In the case of Bitcoin, only a fixed number of coins can ever be created, and the limit can never be increased.
IBM and Stronghold would appear to be combining this protection with the holding of cash reserves with which to back the currency. True believers in cryptocurrencies may baulk at the dollar link, because they see Bitcoin and other currencies as protection against the nation-state and its tendency to print money, generating inflation and destroying the assets of its citizens.
Reputational risks for IBM
More practically, it is not clear how IBM and Stronghold will hold the Stronghold USD at whatever parity is chosen against the dollar, should the market take a different view of its value. Traditional currencies have, in the past, been pushed off pegs to stronger denominations by waves of market selling.
IBM will have weighed carefully the potential reputational risks arising from involvement in cryptocurrency. Sites have been hacked in the past and coins stolen, while regulators are increasingly taking an interest in the governance, or lack of it, of cryptocurrencies.
Lesser-known cryptocurrencies are vulnerable to “pumping and dumping” by unscrupulous operators who sell investors what prove to be worthless crypto coins. Yet investors remain keen.
In one recent case, a critic of cryptocurrencies posted one night a thought leadership piece online that contained the clear warning, “I’m not creating any new technologies, this is an absolute scam.” The next morning, he was astonished to find $200,000-worth of interest from investors.