The cryptocurrency has emerged as a disruptive player, but there are many similarities with the boom-and-bust spectacles of the past
Bitcoin has created new billionaires, but is it a bubble about to burst?
No one has touched or seen them, and yet the collective value of all the Bitcoins currently in circulation is larger than the economy of New Zealand. Over the past week, the cryptocurrency has been the focus of frenzied speculation by investors, who drove the value of one Bitcoin to a peak price of $20,000, before it slumped to $16,000 a short while later. In a matter of hours, some $33 billion of value was created and wiped out. The boom has added new names to the global ranks of billionaires, but critics insist that this is a bubble poised to burst and hurt the people who are boosting it.
Certainly, unlike traditional money, Bitcoin has no asset value; it is unsupported by centralised banking and people cannot earn interest on it. It derives its value from those who believe in it, and the manner and velocity at which those believers have proliferated this year – particularly over the past few weeks – bear all the hallmarks of the spectacular financial bubbles of yesteryears. Bitcoin aficionados liken it to gold. The cryptocurrency, like the precious metal, has to be “mined”. But the utility of gold is not purely economic; it has, and has had, in almost every culture an aesthetic appeal that made it desirable in the first place. Bitcoin champions argue that it is a democratising tool because it weakens the power of traditionally dominant institutions in the existing financial system. But the recondite process of “mining” Bitcoins is energy intensive. The specialised computers used by Bitcoin miners consume an estimated 215 kilowatt-hours of energy for every unit of the cryptocurrency they produce: that is roughly the amount of energy used by an average American family in a week.
Despite such concerns, and in the face of all the warnings issued by establishment figures, Bitcoin has grown into a seriously disruptive player in the market. On Sunday, it will be launched on a major futures exchange in Chicago. Cameron Winklewoss, the billionaire Bitcoin investor, told The National this week that he believes the surge of enthusiasm is “just the beginning”. A lot of real money is being borrowed to feed the frenzy around Bitcoin, in spite of the volatility of the market. In 2015, the UAE witnessed a similar phenomenon when the value of the rupee declined, promoting a flight of borrowed capital from here to India. There have been a lot of stories about Bitcoin winners in recent weeks. Will these be followed by tales of Bitcoin losers?
Follow The National's Opinion section on Twitter