“It is a fraud”. Jamie Dimon, chief executive of JPMorgan, one of the biggest banks in the world, did not mince his words when asked about the breathtaking ascent of Bitcoin and other cryptocurrencies. Promising to fire employees who are willing to trade bitcoins “for stupidity”, he compared their meteoric rise to “tulip bulbs”.

Economists talk about tulip mania when markets are overheated. As in 17th century Holland, when the Dutch, excited about the varied beauty of these oriental flowers – an exotic novelty at the time – were offering ever higher prices for its bulbs until the market for the Dutch national flower spectacularly crashed in February 1637.

Cryptocurrencies, like tulips, are certainly not a fraud. People are paying out of free will for these virtual tokens, and many are willing to exchange them for goods and services – increasingly so. A London real estate developer has recently announced it would price apartments in Bitcoin, and many retailers and fashion outlets are following suit.

As transactions in virtual currencies are encrypted and do not pass through banks or clearing houses, thorny issues like embargo circumvention, money laundering or tax evasion become less of a headache for cyber operators. A thriving market has therefore evolved in illicit goods like drugs, weapons and hazardous materials, and crime prevention agencies have a difficult time detecting such transactions. Generally speaking though, most operations are far from sinister.

When talking about cryptocurrencies – and there are now many more tokens around fashioned in a similar way, like Etherum, Dash, Litecoin or Dogecoin – one has to distinguish between the technology enabling such payment systems and the “coins” themselves. When starting to explore the possibilities of fast and secure exchanges of value between parties, the anonymous software programmer ‘Satoshi Nakamoto’, who may have been not Japanese at all, set up what was essentially a new way of bookkeeping. Instead of using central clearing agents like banks or stock exchanges which would guarantee the correctness of transfers, he believed that a system of ‘distributed ledgers’ would provide more security and speed than the usual double-entry accounting.

This means that any transfer is registered by thousands of peers in synchronisation, summarising bundles of entries in ‘blocks’ and passing them on to peers in the network. With an ever-growing mass of such repeated entries, a fraudulent reversal of any transaction becomes impossible.

The beauty of it is apparent. As this is a peer-to-peer network, designed like a fishnet and not dependent on hubs acting in a centralised manner (try to fathom the hubs of airlines) it is not only nuke-safe, because there is no way to wipe out all participants at once, it is also free (think of your banking fees) and happening in real time (how long do we usually have to wait until our bank feels in the mood to credit our accounts?). One does not have to be a drug baron to relish such benefits.

The virtual currency, on the other hand, which is used by participants as a means of exchange, is not a currency at all. It is something like the internet version of a cowry shell. People can agree to pay with it, they can exchange it for all kinds of things and undertakings, or they can collect it and revel in its – virtual – beauty, but it is not money.

It can feel liberating, thrillingly adventurous to participate in this craze, never mind the looming losses

Money is by definition ‘legal tender’, meaning that the State legislates the universality of its currency, forcing people to accept it, guaranteeing it and controlling its supply. Cyber coins are not legal tender. One can accept them or not. They can circulate unregulated, gaining or losing in value, and are therefore not fulfilling one of the central functions of money as a preserver of value over time. If they were money, it would be illegal to issue them, as states reserve for themselves the monopoly of money creation. Printing money DIY-style is a criminal offence.

Cryptocurrencies are created by software design. The process is called ‘mining’, whereby participants or “nodes” are rewarded with “coins” for doing the bookkeeping work necessary to process ever more, snowballing entries, which demand ever higher computing power. While in the beginning everybody could ‘mine’ with the help of a PC, today’s processors are ventilated, air-conditioned factories consuming vast amounts of electricity.

To avoid debasing the value of coins over time, the basic programme of this ledger system reduces the rewards for ‘block-chaining’ gradually to infinitesimally smaller rewards until it will reach zero. Nakamoto has limited the amount of bitcoin to 21 million units, for instance. Hence the creation of ever more cyber coins to satisfy an ever more popular demand.

Internet start-ups are increasingly funding their business ideas with ‘Initial Coin Offerings’, accepting coins as share capital. Most of them are quick to exchange them for real dollars, leaving investors in doubt about what their investment is all about. Countries like China and South Korea have outlawed this practice now and may one day reclaim their money monopoly completely. Cryptocurrencies will in such instances never again return to the real world. Cyber cambists, which set daily exchange rates for coins versus cash, will be defunct. Venezuela for once is on the forefront of this. Using bitcoins will land you in prison for a long while.

From an investment – or gambling – standpoint, having horded coins at an early stage proved highly rewarding. The first market rate offered for Bitcoin in March 2010 was 0.003 USD cents. On September 1, 2017 it traded for $5,000. Prices in between fluctuated wildly though, rocked by adverse incidents like successful hacking attempts, thefts or the admission of Mt. Gox, the largest exchange at the time, of having ‘lost’ 850,000 coins in the depths of its computing programmes.

Mr Dimon’s interview mentioned above had a similarly devastating effect on the cyber currency: the very next day Bitcoin dropped from 4.350 to 2.981.05.

To invest in a cyber commodity fashioned like money is a high-risk undertaking, as we can see. Prices have reached astronomical levels and rightly remind us of the Dutch tulips.

Yet it can feel liberating, thrillingly adventurous to participate in this craze, never mind the looming losses. When it comes to money we can be anything but economical. If we were, nobody would ever buy a lottery ticket.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

Please send in any suggestions for discussion in this column to: editor@timesofmalta.com – Subject: Sunday Times Personal Finance.