Why the end may be near for bitcoin, but just maybe

Bitcoin hits record high amid bubble fears

The rise has been breathless: From a recent low of $3,226 on Sept.14, bitcoin pushed past $17,000 on Thursday, an incredible gain of more than 400 percent in less than three months.

Is this a massive bubble? The consensus seems to be "yes -- but the technology will last" with parallels to the dot-com bubble. Sure, Pets.com isn't around anymore. But Amazon (AMZN) survived and prospered, and CEO Jeff Bezos is now the world's richest man. 

The latest cryptocurrency excitement seems to stem from word that institutional investors are on the verge of joining in on the bitcoin craze. The Chicago Mercantile Exchange and the Chicago Board Options Exchange both plan to start trading in bitcoin futures later this month. Yet, I can't help but fear a nasty end. 

Regulators seem spooked, with South Korea's prime minister fearing "serious pathological phenomena," while the UK plans a crackdown by forcing users to disclose their identities. Russia and China have already leaned against the trend. And in the US, the IRS won a case against Coinbase -- a popular cryptocurrency exchange -- to disclose user information amid a wide gap between the number of bitcoin traders and the number reporting gains for tax purposes. 

As prices rise and unsophisticated investors get caught in the whirlwind and present a growing risk to financial system stability, officials are growing nervous. 

The financial system is concerned as well. A number of large Wall Street banks fear that futures trading will be too volatile, potentially undermining exchange stability. And some retailers are balking. For instance, online game platform Steam no longer accepts bitcoin as payment. 

The specter of fraud also lingers, with no legal recourse for those robbed because of the anonymous, decentralized nature of the beast. The irony of that is: "It's not a bug, it's a feature." Bitcoin is so easily swiped by hackers, whether it's the Mt. Gox bankruptcy in 2014 or the $31 million hack of the Tether Treasury in November or Wednesday's $62 million hack of Nice Hash. 

Also, that anonymity attracts the ire of policymakers given its cyber-libertarian roots. 

Could these vulnerabilities -- to cybertheft and a regulatory crackdown -- be what ultimately pops this bubble?

Winklevoss twins first bitcoin billionaires

Other issues concern bitcoin's "application layer," which make it unsuitable for small transactions because of processing delays -- a far cry from the speedy response of existing card processors like Visa (V). This is the reason behind the "hard fork" with Bitcoin Cash, the rise of alternatives like Ethereum and ongoing efforts to make bitcoin a more efficient means of wealth transfer -- which, after all, was its original intended purpose. 

The competition is heating up as well. Services like Apple Pay's messaging functionality and Venmo are moving "cash" into the digital age with the protections consumers expect from the regulated financial system. Plus, since these are backed by the dollar (which is legal tender), there are no tax implications, unlike with every bitcoin transaction. 

Still, the bitcoin bulls have a strong case, obviously. Mainly, that bitcoin has built-in scarcity with the supply never able to exceed the predetermined cap. And it's the antithesis of this era of aggressive central bank-based cheap-money stimulus. Tax avoidance has also played a role. And bitcoin has first-mover advantage among cryptocurrencies, lending liquidity and marketing benefits other "alt" coins don't enjoy. 

But when my wife's hairdresser touts her bitcoin winnings -- having gotten in on the action over Thanksgiving despite not fully understanding what bitcoin is -- I can't help but think the end is near.

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