Bitcoin: A bet on a bubble about to burst?

by

Source: Getty

What is Bitcoin and should we trust it? Five years after the cryptocurrency first burst into the public consciousness, many are still asking this most fundamental question.

Nevertheless this month Leo Melamed, chairman emeritus of the world’s largest futures and options exchange CME Group, predicted the cryptocurrency will go on to become a new asset class alongside gold and traditional stocks.

Yet the persistent doubts are understandable. After all, Bitcoin has nothing behind it - no central bank and no government - and it is an entirely intangible asset.

There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power.

And yet the value of the cryptocurrency has soared, making millionaires of people who invested in it in the early days.

But there is still plenty of cynicism around Bitcoins. As recently as September, JP Morgan Chase chief executive Jamie Dimon called the cryptocurrency a “fraud”.

Such misgivings often stem from Bitcoin’s implausibly rapid rise in value. In late 2016, one Bitcoin was worth around $770 (£586).

A single Bitcoin is now worth $7,087 (£5,379) - nearly 10 times as much. In fact, the value of bitcoin has surged 750 per cent this year from $973 (£745) in January.

It would be a brave investor who chose to completely ignore Mr Dimon’s warnings two months ago. And growth of the kind seen by Bitcoin this year would lead most savvy market watchers to speculate that this is not only a bubble, but one that is about to burst.

Nevertheless, the fact that CME will allow investors to trade futures in Bitcoins has helped boost the price of the cryptocurrency still further. But surely most investors are going to want to understand it better first before they risk real hard cash? Otherwise, they are simply taking a bet on the price of something that doesn’t necessarily exist.

Ultimately, that’s the problem with Bitcoin: it isn’t backed by a central bank. More to the point, the central banks are beginning to get in on the act themselves - by exploring blockchain technology to create their own crypto-currencies but with one subtle difference; theirs will have government backing.

Mr Melamed may be right that Bitcoin could well be traded in the same way other currencies are, if we are willing to look past the fact that its very existence relies on an extremely robust computer programme.

But what will people do if the whole thing crashes? Presumably, the answer will be to turn everything off and reboot the system.