Bitcoin’s boom raises fears of a bubble
Despite crypto currency’s risk, new crypto-hedge funds entering market and investors piling in
The astronomical rise and fall of bitcoin has stoked fears about the risky, hypervolatile and highly speculative nature of crypto-currency investment, but experts say it also suggests bitcoin is gaining mainstream traction, at least as an asset class.
“It’s exciting and scary at the same time,” said Garrick Hileman, a research fellow at the University of Cambridge’s Judge Business School who is best known for his research on monetary systems innovation.
He said bitcoin’s near 1,100-per-cent year-to-date increase through Wednesday to top a record $11,000 (U.S.) before dropping by $2,000 over a matter of hours Thursday on profit-taking and trading outages is more about “pure mania” than bitcoin’s value as a real-world currency.
(As of Thursday midday, one bitcoin, which can be exchanged for products, services and other currencies, was valued at $12,478.17 Canadian)
Hileman said evidence suggests that few investors are buying bitcoin as a means of exchange, with research from Cambridge showing only 100,000 merchants and vendors accepted bitcoin as payment as of 2015.
Even so, new users have skyrocketed from the 2.9 million to 5.8 million at the start of the year in tandem with the currency’s own ascent. And while retail investors who can trade bitcoins through new venture capital funds risk getting burned, Hileman said increasing awareness could have a hockey-stick effect, driving up usage and acceptance after a period of flat growth.
Traders are betting on the creation of a powerful new asset class that is as yet largely unregulated, he said, adding that “price frenzy can accelerate adoption.”
He also said that potential threats, including technical issues or new, restrictive regulations could trigger a collapse in values over time.
Indeed, Thursday’s rapid price drop coincided with reports of interruptions and service outages at bitcoin exchanges that reflect the increasing investor interest in the currencies
Bitcoin shows signs of a classic bubble, added James Hughes, chief mar- ket analyst at FX broker AxiTrader, who said “anything that rockets higher tends to fall down faster when the time comes, and the time will come.”
Still, a number of other experts see plenty of upside.
As such, scores of new cryptohedge funds are entering the market, and retail investors have been piling in. Several large market exchanges including Nasdaq, CBOE Holdings and CME Group — the world’s largest derivatives exchange — are plan- ning to provide futures contracts based on bitcoin, while media reports suggest investment banking giant Goldman Sachs is exploring a new trading operation dedicated to crypto currencies. Exchanges like CME, however, might require brokers to post extra collateral to trade bitcoin futures given the volatility.
London-based Blockchain.info, one of the biggest global bitcoin wallet-providers, meanwhile told Reuters on Wednesday it had added a record number of new users on Tuesday, with more than 100,000 customers signing up, taking the total number to more than 19 million.
But bitcoin’s rapid ascent has also prompted warnings from prominent investors including one Bank of England deputy governor, who said investors should “do their homework” before investing in the digital currency.
Federal Reserve Bank of New York President William Dudley added during an event Wednesday in New Jersey that bitcoin “is not a stable store of value. I would be, at this point, pretty skeptical of bitcoin. I think it’s really more of a speculative activity.”
The digital currency’s quick ascent has stoked fears of creating a bubble that could burst, like the dot-com crash and housing market collapse that led to the financial crisis.
Still, Dudley pointed out bitcoin is different in that it’s still a niche market. “Bitcoin is tiny relative to the amount of payment transactions that are executed.”