Sunday, January 16

The Bitcoin boom threatens to turn it into pure gold | Technology

Bitcoin is back, along with the debate about its value. The price of the digital currency is skyrocketing, reaching over $ 40,000 for the first time last week, having doubled in less than a month.

Its price has risen more than 700% since the pandemic was first declared in March of last year, going from about $ 5,000.

But breathless headlines are nothing new for the 12-year-old cryptocurrency. Bitcoin has been here before, in the previous decade, when it fell apart with a predictable outcome. Drawing parallels to the 17th century tulip mania, bitcoin soared from just under $ 1,000 in early 2017 to approach $ 20,000 in 12 months, then crashed to around $ 3,000 in a few weeks in early 2018. .

Bitcoin price / dollar

Back then, most investors, central bankers, and financiers dismissed it as a dangerous and anonymous instrument for scammers and terrorists, warning that it was a disaster waiting to happen for unwitting gamblers risking being swept away. Among his biggest critics at the time, Jamie Dimon, JPMorgan’s chief executive, labeled it a “fraud” that would explode, saying at a bankers conference in late 2017: “If you’re stupid enough to buy it, one day you will pay the price for it. ” . “

There are currently more than 18 million bitcoins, generated by “miners” who also provide the computational power that sustains the blockchain, a digital ledger maintained by thousands of computers around the world that records transactions made with the currency. The mathematical system that generates new bitcoins, which is decentralized and therefore does not have a control institution, such as a central bank, has a maximum wiring of 21 million coins.

Far from exploding, anyone who chose to “hodl,” or hold onto bitcoin, in the jargon of his legion of online supporters, could have made enough money to make even America’s highest-paid banking executive blush. Dimon’s own daughter was among the owners, and she emailed him after his “stupid” comment to tell him she had two bitcoins. Today, that modest stake would be worth more than $ 80,000.

This time around, Dimon and the rest of Wall Street are changing their tune, with a growing number of top institutional investors, hedge funds and pension fund managers buying up. While he keeps saying “it’s not my cup of tea,” Dimon admitted last month that some “very smart people” were getting involved.

Once seen as an anarchist and anti-system project to overthrow modern capitalism, bitcoin buyers now include mainstays of the financial elite on Wall Street and in the city, including companies like UK fund manager Ruffer.

Analysts say that three main factors are driving the price of bitcoin. First of all, the media frenzy surrounding the latest digital currency boom has attracted speculative buyers. Second, the involvement of traditional money managers is flourishing in a maturing market. And finally, the big players see it as a hedge against inflation.

Head and shoulder shot of Jamie Dimon against a black background

Jamie Dimon, a longtime Bitcoin skeptic, has admitted that ‘very smart people’ are now getting involved in the market. Photograph: Jeenah Moon / Reuters

Expectations for stronger growth in average consumer prices are rising amid hopes that the coronavirus vaccine will spur a rapid economic recovery at a time when central banks are still pumping billions of pounds into their economies through quantitative easing. Inflation would erode the value of “fiat” currencies – government-backed money – making digital currencies a potentially attractive proposition.

In the past, investors bought assets like gold, which are perceived as ways to insure against inflation because they tend to hold their value during times of economic stress. This time around, some analysts argue that bitcoin could rival precious metals as an alternative. Since October, more than $ 3bn (£ 2.2bn) has been invested in the Grayscale Bitcoin Trust, an investment vehicle that tracks the value of bitcoin.

JPMorgan analysts have said that bitcoins could be worth up to $ 146,000 each if consolidated like gold. Comparing the digital currency to the precious metal, he said that Bitcoin would need to increase more than four times to match the $ 2.7 trillion value of gold owned by private investors. This would mean “implying a theoretical bitcoin price of $ 146k,” he said. However, to match the perceived value of gold, established for millennia as a thing worth owning, the currency would have to become much less volatile, according to Nikolaos Panigirtzoglou, the analyst who wrote the research.

He said that Bitcoin is likely to have peaked for the year and could suffer a sharp drop if it spikes further. “If anything, the hot money that is currently happening is increasing the volatility of bitcoin. In a way, that’s actually delaying its convergence with gold, which is key to its sustainability.

“I would not be surprised if there was no correction. The size of that correction depends on how far you go. If it hits $ 100,000, I think the correction will be big. “

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