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Bitcoin's deep plunge and subsequent recovery on Wednesday underlines the battle of wills over how to value the world's best-known cryptocurrency.

The virtual money, which soared as high as $18,674 (U.S.) in mid-December, has been losing ground this month. It started Wednesday by plummeting as much as 14 per cent, sinking below $9,300, before rebounding to pass $11,200 in later trading.

The gut-wrenching volatility demonstrates how divided investors are when it comes to valuing a pseudo-money that has no backing in either precious metals or government support.

Read more: Regulatory fears hammer bitcoin below $10,000, half its peak value

Skeptics are becoming increasingly vociferous in stating their belief that bitcoin is a sham. "Claims that cryptocurrencies will replace established fiat currencies are rubbish," Vicky Redwood and Kerrie Walsh of Capital Economics wrote in a report on Wednesday. "Our view is that bitcoin is a bubble."

Of course, true believers are just as straightforward in declaring their belief that cryptocurrencies have a glowing future.

The fascinating aspect of all this is that they may be right, although not in the way they think.

Bitcoin and its crypto-brethren emerged from the cypherpunk movement of the 1990s, an alliance of activists who believed cryptography and other privacy-protecting technology could help change the world. They dreamed of a libertarian utopia where ordinary folks could build an economy not dominated by big government and big business.

This was naive. Cryptos crashed this week in part because governments are taking note of how digital tokens can be used for tax evasion and other criminal activities. Regulators are also worried about the potential for naive investors to lose money in cryptos. China and South Korea, two of the most active crypto-markets, are moving to crack down on virtual cash. Other countries are likely to follow suit.

That's what happens when libertarian fantasy meets the reality of big government.

For now, investors should be cautious about cryptocurrencies. Any fresh signs that upstart forms of digital cash are helping criminals or posing a threat to the existing order are likely to be met with even sterner regulatory measures.

Yet, even bitcoin doubters such as the folks at Capital Economics believe the blockchain technology that underlies bitcoin could be transformational.

Blockchain is essentially a way to construct a secure ledger of transactions distributed across a network of users. It allows people who don't trust one another to do deals, without the need for any central authority to stand in the middle.

The technology could help slash the costs of many financial transactions. It has the potential to reduce banks' infrastructure costs for cross-border payments, securities trading and regulatory compliance by more than $15-billion a year by 2022, according to Santander Group, the Spanish banking group.

That's grand news (at least if you're a bank executive), but the most thought-provoking application of blockchain is the possibility central banks may decide to issue digital versions of their own currencies.

As Capital Economics notes, this could give holders of existing currencies all the efficiency aspects of cryptocurrencies – notably, the ability to conduct speedy transactions across international borders – while doing away with the negatives that go along with bitcoin and other forms of electronic money that allow people to hide their real identities.

The eventual replacement of physical dollars, euros and pounds with blockchain-based forms of the same fiat currencies would not be a jarring transition for people who already rely on debit cards and credit cards to handle their transactions. But it would give central banks important new powers.

For instance, the overseers of our financial system would no longer have to worry about the zero lower bound on interest rates. If a recession hit and a central bank deemed it wise to drop rates into negative territory, it could do so because savers would no longer have the option of being able to hoard their wealth in the form of physical cash.

You will note the paradox here. Blockchain, a technology devised to avoid the heavy hand of government and big business, could become an important tool for enhancing the profits of big business and extending the power of government. That's not what its creators wanted. But it's what they may get.

As advisors shift their business to focus on more value-added offerings, many are starting to position themselves as the do-everything advisor.

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