Will the bitcoin bubble burst?
The price of bitcoin has been soaring this year, and last week alone it jumped from $11,000 to well over $17,000, according to Coindesk. It started the year below $1,000.
That rocketing level of appreciation smells a lot like an irrational investor mania to many economists and financial pros, the kind that sent prices for unprofitable startup internet companies soaring in the dot-com boom. Those prices eventually came crashing down.
“We saw this in the 1990s,” says Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management. “Any of those things sound familiar? ’This is unique, this will change everything?”’
Like many others in finance, Ritholtz expects the bitcoin bubble to pop. The only question is when. “Some people think it’s early days, some people think it’s late,” Ritholtz said. “We’ll find out in the not-too-distant-future who is right.”
Robert Shiller and Joseph Stiglitz, two Nobel-prize winning economists who’ve seen their share of speculative manias, recently have called bitcoin a bubble. Stiglitz went so far as to tell Bloomberg TV that bitcoin should be “outlawed.”
Bitcoin was created in hopes it would become a new kind of currency that people could use outside of the traditional banking system, without backing from any country or central bank. It was also supposed to operate outside of government oversight, which has raised concerns that it will be a haven for criminals.
Its value is tied only to what people believe it’s worth at any given time.
Despite the growing interest, bitcoin still is not widely accepted in stores to buy merchandise, and you can’t deposit it at a bank. One of the problems with using it as a currency is that its value keeps bouncing around, sometimes very suddenly.
This week mainstream financial markets are for the first time allowing investors to make future bets on the direction of bitcoin, but bitcoins themselves will continued to be traded only on private exchanges, which are mostly out of reach of regulators.