Bitcoin at crossroads after shedding nearly $20 billion in value

Did Jamie Dimon obliterate bitcoin’s buzz?

Bitcoin and other digital currencies have been getting absolutely toasted in recent trade, with some wondering if withering criticism from Wall Street heavyweights, like J.P. Morgan Chase’s JPM, +0.29% CEO, and growing regulatory scrutiny in China have finally combined to exact a punishing, and lasting, toll on one of the most bubblicious segments of finance.

On Wednesday, the value of a single bitcoin, near its low, was at $3,772, compared with around $5,000 in early September and representing a roughly $18.5 billion loss of market value in the world’s No. 1 cryptocurrency, according to digital-currency site Ether tokens, the second-most popular digital currency, were down more than 11% at $260.13 in recent action. That equates to a loss of more than $11 billion in total value for the currency running on the Ethereum blockchain.

Still, bitcoin’s rise has been dazzling, rallying some 300% so far in 2017. By comparison, the Dow Jones Industrial Average DJIA, +0.18% and the S&P 500 index SPX, +0.08% are each up by nearly 12% this year, sparking a litany of pronouncements that U.S. equities are too rich.

At least part of the drop in bitcoin is due to excoriating comments made by Dimon on Tuesday, who referred to it as “a fraud”, among other indictments, at a banking conference. He reiterated those remarks at a separate conference later that day.

On Wednesday, prominent investor and market pundit Mohamed El-Erian, chief economic adviser at Allianz Global Investors, added further fuel to bitcoin’s bearish fire, making the case that bitcoin might lose a third or half its value.

“The current pricing assume massive adoption, and I don’t think governments will allow the amount of adoption that’s currently priced in,” he said on CNBC Wednesday morning in New York.

Bitcoin bulls have been up in arms about the onslaught of negative comments. But talk of a bubble and the increased attention on digital currencies, and the underlying blockchain technology, are drawing may signify that the cyberunits are at an important crossroads. That could determine whether bitcoin, or some other cryptocurrency becomes a mainstream instrument, challenging fiat currencies like the U.S. dollar DXY, +0.02% or just a case study in irrational exuberance.

“Dimon says that bitcoin is a fraud because all of the value is being driven by speculation and not utility. There is a grain of truth to that. Bitcoin has not yet seen wide adoption for day-to-day transactions, but the number of transactions occurring across the globe has been rising, particularly in 2017,” said Perry Woodin, CEO of Node 40, a blockchain governance company.

Indeed, bitcoin is making headway across the globe, from the U.S. to Japan and China.

But of late, recent regulatory rumblings out of China have appeared to set the stage for the current pullback in bitcoin and the broader crypto market.

According to The Wall Street Journal, Chinese regulators are planning to shutdown bitcoin exchanges. Although some in the industry have challenged the veracity of those reports, China is a major hub for bitcoin activity, representing about 20% of bitcoin mining and trade, said Charles Hayter, co-founder of CryptoCompare in an interview.

China is cracking down on illicit uses of digital currencies and has also is monitoring so-called initial currency offerings, or fundraising tied to digital-currency ventures that has recently supplanted traditional, early-stage venture investing in 2017.

Read: What is an ICO?

“There has been a free fall of late and it is making everybody quite scared,” Hayter said. He said he welcomes increased regulation from places like the U.S. and China, which may help to legitimize a currency that is in its infancy. But questions abound as to the role China, if any, will play in bitcoin’s outlook.

“China is always an enigma wrapped in an enigma so you don’t always see what’s happening,” he said.

About Dimon’s comments Hayter said, “Bitcoin likes to view that as a ‘poor me excuse.’” Meaning, banks may view digital currencies as a rival to their business models of moving money for a fee.

Here’s what Elizabeth Stark, CEO and co-founder of Lightning Labs, a blockchain-related company, had to say about Dimon:

“I think it’s quite shortsighted to be so disparaging about this emerging industry, especially without a core understanding,” Hayter also said.

Bharath Rao, founder and chief executive of digital currency trading platform Leverj, said what many critics fail to understand about cryptocurrencies is their potential to be revolutionary, which some have equated to the internet in its early stages, around the early 1980s or 1990s, or even the industrial revolution.

“Bitcoin is a technology breakthrough like the steam engine was a couple of hundred years ago. Those that call it a fraud will simply be run over by it,” Rao said.

“There are a number of people who hold most of their assets in cryptocurrency, particularly bitcoin because they are convinced it is the future. This number is growing by the day as people who taste financial freedom are unlikely to want to go back to servitude,” he said.

It is also important to point out that bitcoin has been facing its own growing pains that led to some summer hiccups. So-called Bitcoin Cash, which erupted out of the original bitcoin early last month is the result of a faction of bitcoin developers’ demands for a version of that allows virtual miners, which support the currency, to more rapidly process transactions in larger units known as blocks. The original bitcoin also went through an upgrade that increased its processing power without resulting in another currency split.

Whether bitcoin or its successor is the future remains to be seen. However, advocates for bitcoin point to a number of factors that make it a promising enterprise.

The fact that it is decentralized from central banks or governments is one such factor. That means individuals can conduct transactions without an intermediary.

Another bulls point to is the blockchain, or the software that underpins every digital currency.

Check out: Bitcoin is now the most crowded trade around: Bank of America Merrill Lynch

Put simply, blockchain is a digital ledger, or record, that has seen its utility is grow within Wall Street and at institutions like Jamie Dimon’s J.P. Morgan. The bank has been testing blockchain uses to combat the rise of cryptos.

That recognition from the more staid financial community has heartened many bitcoin investors.

“Jamie has far more experience in the financial industry than someone such as myself, but if you have a look at look at the developers in bitcoin…this smells exactly like the early internet,” said Iqbal Gandham, U.K. managing director at eToro, a trading platform.

“This is not a Facebook, this is not a Snapchat. This is something bigger,” Gandham said, referring to social-media giant Facebook Inc. FB, +0.05% which boasts a market value of more than $500 billion, and Snapchat, whose parent company, Snap Inc. SNAP, -0.66% recently became a publicly traded company.

Sometimes it’s hard to tell true innovation from fake. In 1903, the president of Michigan Savings Bank is said to have told Horace Rackham, an early stockholder in Ford, that the “horse is here to stay but the automobile is only a novelty.”

All that said, what happens to bitcoin is anyone’s guess. And it will be marked by bouts of intense volatility, and maybe pain given the tendency of digital currencies to swing wildly.

The question may be: Can investors stomach the roller-coaster ride?

“I think with any market where the liquidity is low, there is always going to be volatility,” Gandham said.