JPMorgan chief executive Jamie Dimon recently called Bitcoin a "fraud" saying that "you can't have a business where people can invent a currency out of thin air." In 2014, Warren Buffett called the digital money "a mirage." He said, "A check is a way of transmitting money too. Are checks worth a whole lot of money?"
However, global investors are embracing Bitcoin because it’s a disruptive technology that can change the banking system.
There's a story behind Bitcoin's record-setting valuation because the U.S. dollar, too, is problematic. Bitcoin's rise reflects the nervousness that investors and ordinary people have about the Federal Reserve's massive creation of new money that devalues the dollar. And the market's skepticism about fiat cash (central bank- or government-issued cash that's not backed by gold) is leading to the remarkable rise of cryptocurrencies.
A year after its introduction, Bitcoin reached its highest price of 39 cents in 2010. Seven years later, Bitcoin's market capitalization topped $74 billion (at $4,500 per coin) in August 2017. The price surge reflects the business community's confidence in the digital currency as both store of value and acceptable medium of exchange. That means wider adoption by merchants, consumers and investors. But it also underscores people's frustrations with the devaluation of government-issued cash, fees charged by banks, privacy concerns, and lengthy processing times of cross-border payments.
For thousands of years, commodity-money like gold and silver were used to barter for goods and services. Economist Milton Friedman predicted the rise of electronic cash, and he advocated the abolition of the Federal Reserve. The Fed's inflation-causing monetary policies have led to the U.S. dollar losing nearly 97 percent of its value since 1913. That means generations of Americans have lost vast amounts of their purchasing power due to excessive printing of cash in order to finance the U.S. government's deficit spending.
The 2008 financial crisis sent shockwaves throughout the global economy and resulted in the worst recession in the United States since the 1930s-era Great Depression. Wall Street powerhouses such as Lehman Brothers, Merrill Lynch and other institutions either went bankrupt or were acquired for pennies on the dollar. The Federal Reserve's controversial policy designed to keep interest rates low, known as quantitative easing, led to a massive expansion of the U.S. money supply. To illustrate, quantitative easing 3 (or QE3) launched in September 2012, and together with a different Fed program involved the purchase of $85 billion in long-term Treasury bonds each month, or 1.02 trillion each year. That effectively meant the printing of $85 billion of cash per month, resulting in cheap dollars.
Unlike fiat cash, Bitcoin is seeing growing demand and limited supply. Only 21 million units will ever be "mined" and such scarcity is translating to value. Jamie Dimon used the term "fraud" but he may easily be describing the Fed's policy of stripping value from the dollar. And with quantitative easing, the Fed is creating cash literally out of thin air.