Juha Saarinen: Is the rise of bitcoin and virtual currencies legitimate?

Virtual currencies - most notably bitcoin - have risen rapidly over the past year. Photo / 123RF

How legitimate is the rise of virtual currencies - all of them, and not just Bitcoin?

Not very, if research published this month by Tel Aviv and Tulsa university researchers in the Journal of Monetary Economics is correct.

The reseachers' story goes back to the Mt. Gox Bitcoin exchange in Tokyo that was originally set up as a trading post for fantasy-based game cards. It features two Bitcoin trading bots or automated programs, Markus and Willy, which the researchers believe kicked off the cryptocurrency's spectacular rise in value.

Taken over by Frenchman Mark Karpeles in 2011, Mt. Gox rose to become the world's largest Bitcoin exchange that handled well over two-thirds of all trades in the crypto currency.

Mt. Gox collapsed in 2014 after some 850,000 Bitcoins went walkabouts, Karpeles has pleaded not guilty to embezzlement charges and creditors around the world are chasing the dizzying amount of NZ$3.3 trillion that they say was lost by the exchange.

Bitcoin's exchange rate against fiat currencies has see-sawed dramatically over the past few years, but continued to rise relentlessly. Even though Bitcoin's dropped this year, you still have to fork out over NZ$19,000 to buy one unit of the virtual currency, which was worth just a few dollars each not long ago.

Is there any foundation for the rise in Bitcoin's value? Possibly not, as it appears bot trading may have driven the stratospheric rise of Bitcoin.

The researchers sifted through some 18 million buy and sell transactions leaked from Mt. Gox and alleged that what went on at Mt. Gox could be compared to penny-stock pump'n'dump share trades.

Bitcoin's jumped from US$150 ($206) to US$1,000 ($1,375) in just two months of 2013, largely due to what the researchers allege are trades in which the bots Markus and Willie acquired large amounts of the virtual currency.

The Mt. Gox scandal should've been the end of Bitcoin as an unregulated currency, because it's clearly susceptible to price manipulation. So are the other over 800 cryptocurrencies that exist now, with a total value of somewhere around NZ$175 billion, the researchers note.

Slamming the brakes on Bitcoin until either its users worked out how to self-regulate properly to stop thefts and price manipulation by bots or government regulation was implemented would've stemmed the potential for catastrophic losses.

That hasn't happened however, so if you've ignored all the warnings and punted on Bitcoin and other cryptocurrencies, 2018 could be the year your digital and real world wallets turn into smoking craters.