Bitcoin, the world’s largest digital currency, surged past $52,000 last week stunning finance professionals who had dismissed it as a fad. On Feb. 16, it was trading at just under $10,000. So, what’s driving the market?
What is bitcoin?
Bitcoin is a virtual currency, created 12 years ago, as an alternative
to government-issued “medium of exchange”. It has a similar function as a
“store of value” like gold. But unlike the precious metal, you can’t hold
bitcoin or fashion it into jewellery. It exists only as an electronic file. Transactions
are recorded on a distributed and decentralized ledger. So, if you lose your
bitcoin’s web address, it’s gone for good. No government regulates it.
Bitcoin can be used to buy many things anonymously, from Tesla cars to
illegal items on the Dark Web. And unlike the dollar, only a limited amount
exists.
How do you buy bitcoin?
The easiest way to buy cryptocurrency is through a centralized exchange,
such as Coinbase, Binance, or Cashapp. Each charges a small fee per transaction
and usually will accept credit cards for payment. Fundamentally, speculating on anything is a
gamble.
Bitcoin is the darling of the crypto world now, but even if it gets more
widespread adoption “it’s never been clear if bitcoin will remain the dominant
player here,” said Michael Lowry, a Professor of Finance at Drexel University.
Why is the price of bitcoin rocketing?
Big companies increasingly see it as a legitimate store of value. Elon
Musk, the mega-billionaire CEO of Tesla, earlier this month bought $1.5 billion
of bitcoin and said his company will accept it as payment for its electric
cars. Mastercard this month announced it would support selected crytocurrencies
in its payment network. Apple Pay recently said it would allow bitcoin to be
spent online, in retail stores and on apps.
Is there a precedent for bitcoin’s spike?
In 2017, the price of bitcoin saw a similar run-up when within the year speculators drove bitcoin from about $1,200 to its then-high of $19,783. The “great crypto crash’ followed with its value tumbling 80%. It languished under $10,000 until July 2020 when bitcoin began to regain strength, fuelled by concerns about the Federal stimulus program and fears of inflation.
This time is different. It is driven by institutions. Then again, in a low interest environment this asset class may look attractive. And as usual we have manipulation. An academic paper in the Journal of Finance attributed the rise in 2018 to manipulation that should make people pause!
So, do I invest? If you are prepared to lose then it is fine, for some
do predict the price could go to US$100,000! But it can also go the other way,
if interest rates move up in a year or two, other asset classes may provide
less risk and a fair return. And it is also possible regulators may intervene
in some manner, which will deflate this “irrational exuberance”.
Stay safe!
Reference:
Bitcoin soars to over $52,000. What’s
going on? We answer your questions, Sam Wood, The Inquirer, Feb 22, 2021 (https://www.inquirer.com)
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