Bitcoin bonanza takes hold
"It will crash, I'm pretty confident. It's done that already, and it's going to do it again. But bitcoin is not totally crazy either. It's a new technology and it's a form of money. It has the same mystery of value as real money, and real money persists."
Robert Shiller, Nobel Prize-winning economist
UNITED STATES/BRITAIN: Bitcoins were being offered for almost US$20,000 (NZ$29,300) each yesterday as digital currency speculators created the biggest buying rush in history.
The value of one unit rose by as much as US$6900, or 52 per cent, on some exchanges during the day before settling back to US$15,450 (NZ$22,600).
The rise in its value surpassed ‘‘tulip mania’’ in the 17th century, suggesting that bitcoin is on course to create the largest financial bubble ever.
In the 1630s, the price of some tulip bulbs soared to astronomical levels before crashing in 1637. The value of bitcoin has risen faster over the past three years than the price of tulip bulbs did in the three years before the crash, figures from New York firm Convoy Investments show.
Concerns are being raised that the growth cannot last.
Sir Howard Davies, chairman of Royal Bank of Scotland and former chairman of Britain’s Financial Services Authority, said: ‘‘Put up the sign from Dante’s Inferno – ‘Abandon hope all ye who enter here’. I think that’s probably what’s needed.’’
The cryptocurrency appeared to be a ‘‘frothy investment bubble’’ and ‘‘central banks are anxious about it’’, he told Bloomberg.
Robert Shiller, an American Nobel Prize-winning economist, said: ‘‘It will crash, I’m pretty confident. It’s done that already, and it’s going to do it again. But bitcoin is not totally crazy either. It’s a new technology and it’s a form of money. It has the same mystery of value as real money, and real money persists.’’
A bitcoin is a unit of digital currency that exists as a string of computer code, with no physical form. Its price has risen by nearly 1500 per cent since the start of the year. Last night the combined value of all bitcoins in circulation was US$270 billion (NZ$395b) – more than the value of Royal Dutch Shell, the oil giant that is Britain’s largest company.
Bitcoin was launched in 2008 by Satoshi Nakamoto, a secretive software developer whose true identity has never been uncovered. It was intended as a digital currency, and can be used to pay for goods and services with some retailers. Financiers now see it more as a risky investment.
Watchdogs around the world are concerned that a bitcoin price crash will leave private investors out of pocket. However, the Bank of England and other central banks have said they do not believe a crash poses a risk to the economy.
The apparent theft yesterday of bitcoins worth US$70 million (NZ$102.5m) from NiceHash, a digital currency marketplace, appeared to do little to affect the trajectory of the bitcoin price.
It is unclear what has caused bitcoin’s price to rise so quickly, because transactions are anonymous. However, it is likely that a growing number of private investors, seeing the rising price, have decided to gamble on the digital currency, pushing the price higher.
Several large financial companies are planning to move into the bitcoin market, giving legitimacy to digital currencies.
Jamie Dimon, chief executive of JP Morgan, America’s biggest bank, has said that bitcoin mania is ‘‘worse than tulip bulbs’’ and ‘‘won’t end well’’.
It took nearly five years for the price of one bitcoin to reach
US$1000 after its launch almost a decade ago.
Yesterday it climbed from
US$16,000 to US$17,000 in two hours, having gone from US$15,000 to US$16,000 in five hours earlier in the day.
A bitcoin was worth US$9830 at the start of the month.
Banks warned that financial markets were not prepared for the imminent launch by two large American financial exchanges of new trading products linked to bitcoin.
Walt Lukken, president of the Futures Industry Association, which represents big American banks, including Goldman Sachs and JP Morgan, said he was ‘‘apprehensive with the lack of transparency and regulation’’ of the bitcoin products, which could be ‘‘susceptible to manipulation [and] fraud’’.
The precise value of a bitcoin is difficult to determine because the digital currency is traded at different prices on several exchanges.
On the Bitstamp exchange, which is considered to offer the best benchmark, one bitcoin was worth US$15,450 last night, having risen as high as US$15,995 during the day from a low of US$13,086.
However, some exchanges were offering bitcoins at prices just shy of US$20,000. The price on Coinbase, the largest digital currency exchange in America, peaked above US$19,900 just before midday before rapidly falling to US$17,600.