Bitcoin is back.
Three years after the bubble and its value rose from US $ 5,000 to US $ 20,000 in less than three months burst in spectacular fashion, plummeting more than 80%, the cryptocurrency is once again on a record high.
In recent days it has been trading above US $ 19,000, up from US $ 10,000 in October and US $ 5,900 in March. The price of Ethereum, the second-largest cryptocurrency by market value, has also increased over the past few months, up from less than US $ 250 in July to about US $ 600.
There are wild reports that by the end of 2021, Bitcoin could surge to US $ 100,000, or even US $ 318,000.
Cryptocurrency markets are highly volatile, so perhaps by the time you read this the value may have increased. Or down again.
So what’s happening? Is this another speculative bubble, driven by the “bigger fool theory”?
Not necessarily. Unlike the 2017 bubble – when there was a lot of noise and excitement based on not much mainstream adoption – cryptocurrency price increases have more substance this time around.
The indicator of change is the stance of JPMorgan Chase, the largest bank in the US. In October analysts in the bank’s global asset management arm dipped “doubling or tripling” in the price of Bitcoin.
Obviously something has changed, because back in September 2017 the bank’s chief executive Jamie Dimon called the cryptocurrency a “fraud” and “worse than a tulip bulb”, and said it would fire any employee n trade it for being “stupid”.
Read more: Tulip mania: the classic story of a Dutch financial bubble is generally wrong
Three fundamental trends can be found behind this change of heart.
1. Digital money is coming
First, the economic impact of COVID-19 and governments pumping huge sums of money into economies. With investments such as property, savings and bonds becoming less attractive, investors have been looking to assets with better prospects.
Money has been tilting towards traditional “safe haven” assets such as gold as well as stocks that fit the digital economy. Among the most popular stocks: Apple, Microsoft, Amazon, Etsy, PayPal and Zoom. Bitcoin offers aspects of both.
Read more: In gold we trust: why bullion is still a safe haven in times of crisis
The dramatic rise in online shopping and cashless payments due to COVID-19 has also accelerated interest in digital currencies.
Central banks – including the US Federal Reserve, the European Central Bank, the Bank of Japan, the Swiss National Bank and the Bank of England – are pushing forward to develop their own digital currencies (known as “central bank digital currencies” or CBDCs) . Leading the pack is the People’s Bank of China, which is piloting digital renminbi.
Cryptocurrencies are also becoming more usable through so-called “fixedcoins” with values pegged to central bank currency (US dollars etc) as well as better wallets that make it easier to exchange tokens .
There are indications that these trends will converge. China’s Digital Currency Electronic Payments system will have some level of support for Ethereum applications. Paypal already allows US users to buy Bitcoin through their Paypal accounts, and will enable Paypal payments with Bitcoin next year.
2. The technology is maturing
Second, the technology that supports cryptocurrencies is maturing.
One of the biggest problems for cryptocurrencies becoming mainstream is the huge amount of energy-intensive computing processes required to make transactions secure (which is important because you don’t want the same ticket to spend twice). The carbon emissions from Bitcoin mining have been estimated to be greater than those of a country like Sri Lanka.
Ethereum has embarked on a major technical upgrade (called Eth2) transforming the blockchain into a “test-stake” mechanism that eliminates the energy-intensive computing processes. This should allay the concerns of the returnees on environmental grounds and allow it to increase.
Completely new layers are also being developed that will allow the use of blockchain technologies in financial markets. The latest is decentralized finance (known as defi), using blockchain to build fully digital and automated financial markets. These include decentralized exchanges and derivatives trading without traditional intermediaries such as stock markets or banks. This is only possible by using blockchain infrastructure – and cryptocurrency.
3. Institutions value it
Third – as evidenced by the changing stance at JPMorgan Chase – institutional investors are now embracing cryptocurrency.
Last month, US cryptocurrency asset manager Grayscale Investments surpassed $ US10 billion in cyrptocurrency assets for institutional investors. This week, global financial services firm Guggenheim Partners (which manages more than US $ 275 billion in assets) announced it could invest up to $ US530 million in Bitcoin through Grayscale.
As Rick Rieder, chief executive of BlackRock, the world’s largest investment fund manager (more than US $ 7.4 trillion in managed assets), declared, “cryptocurrency is here to stay”.
Should you buy Bitcoin?
So what does this mean for you as a potential retail investor? Does buying cryptocurrency offer you a chance to make a fortune, as the man is said to turn US $ 3,000 investment in Bitcoin into US $ 25 million?
Not really. It’s still a gamble.
The opportunity was earlier in the year when prices were much lower, and when the markets were full of uncertainty and confusion. Now you are in danger of buying high and selling low.
All cryptocurrencies remain volatile and speculative assets. Many people have been badly burned in the past by coming in at the top.
Read more: More than 1,000 cryptocurrencies have already failed – here’s what will affect future successes
This time may be different, and the Bitcoin bubble will not burst. But if so it will be because cryptocurrency becomes the economic infrastructure of a situation, not the latest wealth meme.
There are no guarantees. Bet only what you can afford to lose.