Bit­coin has been a hugely lu­cra­tive in­vest­ment. But is a crash com­ing?

Some ex­perts say hype over dig­i­tal cur­rency may ex­ceed its value

The Washington Post - - ECONOMY & BUSINESS - BY THOMAS HEATH thomas.heath@wash­

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 ev­ery­one from the prime min­is­ter of South Korea to Fed­eral Re­serve chair nom­i­nee Jerome H. Pow­ell to 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 the 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 ex­change will start a bit­coin fu­tures site on its com­modi­ties trad­ing plat­form in 2018.

Wed­nes­day’s bit­coin surge had Wall Street talk­ing.

“Bub­ble or new as­set class, ei­ther way it’s some­thing that means some­thing,” said Brad McMil­lan, chief in­vest­ment of­fi­cer at Com­mon­wealth Fi­nan­cial Net­work. “Given the ap­pre­ci­a­tion we’ve seen, ev­ery­one is talk­ing about it. You have to re­spond to it, like it or not.”

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.

“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 Coin­Mar­ket­, at 4 p.m. Wed­nes­day, the cryp­tocur­rency mar­ket cap­i­tal­iza­tion was $300 bil­lion and rep­re­sented a uni­verse of 1,328 cur­ren­cies. Bit­coin and Ethereum to­taled twothirds of that $300 bil­lion.

Chris­tian Catal­ini has stud­ied bit­coin closely as an as­sis­tant pro­fes­sor for tech­no­log­i­cal in­no­va­tion at the Mas­sachusetts In­sti­tute of Tech­nol­ogy 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 the blockchain tech­nol­ogy com­mu­nity. That still is higher than the mar­ket value of oil gi­ant BP.

Cor­nell Law School pro­fes­sor Robert Hock­ett, a for­mer ad­viser to the Fed­eral Re­serve Bank of New York and to the In­ter­na­tional Mone­tary Fund, said 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,” he 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 dot­com start-ups were part of the new dig­i­tal tech­nolo­gies back in the late 1990s, which ended in the dot-com crash of 2000.

Dig­i­tal tech­nol­ogy pro­duced win­ners and losers, and the same will hap­pen with blockchain.

“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.”


Bit­coin to­kens, ar­ranged above, rep­re­sent the pop­u­lar dig­i­tal cur­rency that has surged more than 900 per­cent in 2017.

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