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A return of bitcoin to its stratospheric highs has caused top financial experts to scratch their heads and promote cryptocurrencies saying I told you.
But while backers insist this time around is different as bitcoin returns to its all-time high in December 2017 – which at current exchange rates was around $ 26,000 Cdn – many fear that inexperienced speculators will burn their fingers again.
This time around, not only are peculiar electronic tokens once again on a hard-to-explain upside tear, but as bitcoin has risen, gold has declined over the past month.
When I first wrote about bitcoin seven years ago, suggesting it was just like gold, investors in the yellow metal were outraged.
Encrypted typo?
In retrospect, that article “Gold and bit, two sides of the same coin, “rises surprisingly well. But re-reading the piece, the price sounds like an encrypted typo:” On Thursday, the e-currency plunged to around $ 50 after hitting a Wednesday high of around $ 260 “- a drop in 80%.
This time around, an 80% drop in the value of a single bitcoin would be around $ 20,000, although that matters less as you can buy fractions of bitcoin. But why are people piling up on the market now?
According to Hilliard MacBeth, an Edmonton-based author and financial guru who has been in the securities industry for more than 40 years, the bitcoin rush is only part of a larger phenomenon that may be related to the COVID-19 blockade.
“I don’t know if people are at home and don’t know what to do, so they speculated on the markets,” said MacBeth, who describes himself as a cryptocurrency skeptic.
MacBeth says there are signs that, just like in the midst of the Great Depression, those that they actually have money they are offering assets, including stocks and real estate.
“One of the things that attracts people to bitcoin is that they don’t trust the government,” MacBeth said.
But the strange thing is that, despite a trend towards low trust in the government, people are willing to trust the mysterious founder of bitcoin, he said. Without government oversight, Canadians who may have had only a rough idea of how cryptocurrency works have lost small fortunes to people who have proven themselves valid. not be very reliable.
Cryptocurrencies are simply numbers in a computer, but of course this is no different than Canadian dollars in your bank account or the debt count you owe.
But while the crazies have value held roughly stable by the Bank of Canada – and while your savings and mortgage accounts are backed by the authority of your bank and its regulators – cryptocurrencies have neither of those two things.
Backed by mathematics
Instead, virtual currencies are protected by mathematical cryptography, like giant passwords, which hide the name of the person who owns them but confirms that each token is valid. The value is fixed in the market. Unlike gold, cryptocurrencies are easy to transport and especially useful in places where national currencies are unstable or difficult to trade.
Although people can also bid for stocks or real estate, most financial assets have a notional way of establishing their value – by relating them to their present or future earnings, such as dividends or rent, and comparing them to interest rates. market interest.
But for bitcoin, which is relatively aloof from concrete valuation methods, speculation has the potential to run wild. It can be great when shooting. Bitcoin, which produces nothing now and is unlikely to produce anything in the future, have increased by more than 150% this year.
Some see it play the role of a universal currency despite the wild swings in value that have made it in the past almost impossible to use as a trading unit alone.
“The persistent low interest rates are the supposed rationale for the continued interest in bitcoin,” snorted the staid Financial Times in its Lex column on Monday. “But there’s little rationale about cryptocurrencies.”
Paypal recently announced that it would allow some traders to buy, hold and sell bitcoins from their Paypal accounts, and there are reports of a number of large buyers, including Paypal itself.
But while credible financial publications such as the FT continue to express caution about a “frenzy” or “mania“of speculations that can decline as sharply as they rise, young and inexperienced buyers of tokens probably don’t hear them.
Instead, like so much information on the web, sober and traditional wisdom is drowned out by a cacophony of raucous voices that arouse FOMO – fear of getting lost. A search on “how to buy bitcoin” will offer many thousands of options, most of which show how easy it is and few of which emphasize potential risks.
“There is no intrinsic value to something like bitcoin, so it’s not really an asset that you can analyze,” said then-Bank of Canada Governor Stephen Poloz in 2017, just before the token reached its previous peak and the subsequent crash. “It’s just essentially speculation or gambling.”
And just like in all speculation or gambling, the rules are simple: only play when the house is respectable. Never play with money that you cannot afford to lose. And as hard as it may be to know when that time is, get out while you’re ahead.
Follow Don Pittis on Twitter: @don_pittis
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