Digital currency Bitcoin is the worst performing major asset class of 2014. At the start of the year one Bitcoin bought 770 US dollars, now a Bitcoin is only worth $330 USD.
Even the Russian rouble has performed better: it’s only declined forty-five per cent against the dollar. Bitcoin has fallen by near to 60 per cent.
The collapse back in February of Mt. Gox – an online exchange where people traded digital and government-backed currencies – caused the price of Bitcoin to tumble.
Bitcoin may have slumped in 2014, but that doesn’t mean all digital currencies are doomed.
There are many reasons to be hopeful about cryptocurrencies. Here are the five most convincing:
1) Digital currencies have some big-name supporters
Bill Gates, America’s richest man and founder of Microsoft, says he can see the potential of cryptocurrencies.
In an interview with Bloomberg TV, Mr Gates said that Bitcoin is “better than currency” (e.g. traditional currency) because it’s cheaper to transfer. Games console Xbox, which is owned by Microsoft, now accepts Bitcoin payments.
On top of this, billionaire Sir Richard Branson is a digital currency champion and has invested in Bitcoin.
2) Investment in digital currency start-ups continues to grow
Cryptocurrency companies have raised far more money from investors in 2014 than they did last year.
In 2013 venture capital companies poured approximately $88 million (£56 million) into the Bitcoin industry, this year the amount stands at near $268 million.
Xapo, a company specialising in Bitcoin wallets, was the biggest recipient raising $40 million.
In an interview Stewart Douglas, founder of Bitcoin company TradeMore, explained why investment in digital currencies remains strong:
“A lot of venture capital companies are aware Bitcoin could be a big deal in the future and they don’t want to miss the wave. Just like they wouldn’t have wanted to miss the internet wave.”
3) The big banks are setting up rival digital currencies
America’s largest bank JPMorgan Chase filed a patent application for a computerised payment system that resembles Bitcoin late last year.
Big banks aren’t the only ones taking digital currencies seriously. Governments in Iceland and Ecuador are also launching their own cryptocurrencies to rival Bitcoin.
4) Digital currencies could make international payments quicker and cheaper
The World Bank calculates that the average fee for transferring money abroad is eight per cent of the amount sent.
In theory, digital currencies could make international payments far more efficient. This is because cryptocurrencies can be transferred directly from one person to another using a mobile device – it doesn’t have to be sent through an intermediary that charges a fee.
Social entrepreneurs hope currencies will boost the GDP of some of the world’s poorest countries, such as Liberia and Tajikistan, which depend on international remittances.
5) Regulators are becoming less hostile
The UK government launched a call for information in November to find out more about digital currencies and their potential.
The government described the move as a way of supporting the growth of Britain’s emerging FinTech sector. Speaking in August, Chancellor George Osborne said:
“I want the UK to be the world leader in financial technology.”
So while some governments, in countries like Bangladesh and Bolivia, have legislated against Bitcoin, the UK Treasury is backing the development of digital currencies.