There has been lots of commentary in recent days about the frothy state of the stock market and whether or not we’re in the midst of a bubble.
The focus has been on the meteoric rise of GameStop and BlackBerry and a handful of other stocks that were driven higher by an army of online retail investors.
That market action momentarily took the spotlight off Bitcoin, the cryptocurrency that has also seen a huge increase in value in the last couple of months. Bitcoin shot from US$10,000 in late September to over $40,000 in early January, before pulling back to around $34,000.
Bitcoin’s surge may be even more impressive evidence of speculative excess in the markets than the volatile trading in GameStop and BlackBerry. At least those stocks are backed by real businesses with assets, operations and employees. The same can’t be said for Bitcoin, where value is purely in the eye of the beholder.
If you consider it to be a currency, then you must also accept it’s a currency without an economy and taxpayer base to support its value. If you consider it to be a commodity like copper, then you must also accept it’s a commodity without any industrial or other use.
What’s more, Bitcoin’s volatility—it dropped over 80% in 2018—makes a poor store of value compared to gold or more stable currencies such as the U.S. or Canadian dollars.
And it certainly doesn’t seem to be a good medium for financial transactions, even though it was designed to be a digital cash system. Fees on Bitcoin transactions are about US$10 each, and there are now far cheaper options for exchanging money, notes this article by Alex Pickard, Vice President at investment firm Research Affiliates.
Pickard, a onetime Bitcoin miner, claims there are strong signs its price is being manipulated. Whether or not this is true, regulators are definitely stepping up rulemaking and enforcement on cryptocurrencies.
It all adds up to an asset that is completely speculative. In other words, buyers of cryptocurrencies are depending on demand from others to keep the price climbing higher. This isn’t to say Bitcoin’s price will coming crashing down any time soon. As we’ve already seen, it could quickly double or be cut in half, depending on the mood of the market.
It’s also important to note that cryptocurrencies have produced real benefits. They have played a critical role in the development of blockchain technology, which holds the promise of increased efficiency, reduced costs and greater transparency in supply chains and a wide range of industries, including banking.
Where does Bitcoin and its less known crypto cousins go from here? It’s anyone’s guess. One theory is the current boom is tied up with the COVID-19 pandemic. This article wonders whether it’s being fuelled by bored people stuck at home looking for excitement, and crooks who have been deprived of traditional money laundering venues like casinos and restaurants.
Whatever the reason for the rising price of Bitcoin, buying it shouldn’t be mistaken for investing to achieve a goal like saving for a house down payment or retirement. It’s gambling pure and simple with all the excitement and risks that come with taking a trip to the casino.
And just like the casino, if you’re not ready to lose everything you bet, you should stay away.