Bitcoin has been a staggering investment. Is a crash coming?
Whether you think bitcoin is a new path to wealth or the biggest bubble since Beanie Babies, the cryptocurrency was the talk of the financial system Wednesday as it smashed through $11,000 per coin — up $1,000 in 24 hours and up a blistering 900-plus percent since the start of 2017.
The digital currency revolution and bitcoin, in particular, have drawn attention from the prime minister of South Korea, Federal Reserve chair nominee Jerome H. Powell, academics, central banks and JPMorgan Chase chief executive Jamie Dimon. Even singer Katy Perry got into the act, posting a photo on Instagram of her asking Warren Buffett his thoughts on cryptocurrency.
Chicago-based CME Group, the world’s most diverse derivatives marketplace, is expected to launch a contract for bitcoin futures next month. The Nasdaq Stock Market will start a bitcoin futures site on its commodities trading platform in 2018.
Bitcoin was created by an unknown person in 2009 under the alias of Satoshi Nakamoto. Bitcoins can be used to buy merchandise anonymously, without a middleman, and involving lower or no fees and no banks.
The currency is traded on “bitcoin exchanges” where people can buy and sell using various currencies. Bitcoins are a product of something called “blockchain technology,” and they are stored in digital wallets that exist in the cloud or on people’s computers.
The currency is unregulated, and its future is uncertain. No one owns the bitcoin network. It is not tied to any government or country.
Jay Blaskey, a digital currency specialist at BitIRA, a retirement option for cryptocurrencies, said bitcoin represents the next evolution of money.
[What is Bitcoin? AP explains.]
“It’s a bit of a paradigm shift in currency,” Blaskey said. “In the Bronze Age, we had metal. With the dawn of literacy, we used notes. Today we are living in the technology age, and this is the first real solution built in this environment to suit the needs of this current technology-connected world.”
There are 16.7 million bitcoins in circulation. According to CoinMarketCap.com, at 4 p.m. Wednesday, the cryptocurrency market capitalization was $300 billion and represented a universe of 1,328 currencies. Bitcoin and Ethereum totaled two-thirds of that $300 billion.
Christian Catalini has studied bitcoin closely as an assistant professor for technological innovation at the MIT Sloan School of Management.
“Bitcoin is maturing, and interest from institutional investors is growing. There is a lot of enthusiasm, but part of it is likely driven by hype,” Catalini said. “One should be worried about that. Guessing the timing [of a crash] will be extremely difficult, but it’s clear that when it moves so quickly over such a short period of time, there may be a separation between the value the network is able to deliver and what people think it’s delivering.”
Indeed, the cryptocurrency had settled back in the $10,000 range late afternoon Wednesday, still giving it a market capitalization of more than $160 billion, according to CoinDesk, an information services company for digital assets and blockchain technology community. That still is higher than the market value of oil giant BP.
Cornell Law School professor Robert Hockett is a former adviser to the Federal Reserve Bank of New York and to the International Monetary Fund. He said the bitcoin itself is a bubble akin to the 17th-century Dutch tulip bulb mania, a speculative phenomenon that sent the price of tulip bulbs soaring — only to crash in value.
“Bitcoin is 21st-century tulips,” Hockett said. “I’m not skeptical about cryptocurrencies in general or blockchain technology. It’s just insofar as people are speculating on bitcoin in particular, they are buying simply because they expect other people to buy. That is the definition of an asset bubble.”
Hockett and others believe the blockchain technologies will one day provide the backbone of an international payment system, especially as central banks look to upgrade their payment technologies.
Hockett views bitcoin as just one part of the new blockchain technology, just as specific dot-com start-ups were part of the new digital technologies in the late 1990s, which ended in the dot-com crash of 2000.
“If you think of investing in one example of the technology, like bitcoin, it’s probably a fad investment,” Hockett said. “If, on the other hand, you are investing in the blockchain technology as a whole, through other kinds of cryptocurrencies like Ethereum, then you are going to diversify your portfolio.”