Virtual currency Bitcoin has reached an all-time high exchange rate of $10,000, but major banking institutions appear no closer to letting down their guard on the volatile technology.
If it looks and acts like a bubble, it very well could be a bubble.
Bitcoin’s meteoric rise reminds many Wall Street pros of the irrational exuberance during earlier financial manias, such as real estate in 2007, Internet stocks in 1999 and the Dutch tulip craze in the 1600s. All of these booms, of course, ended in busts.
Whether those comparisons will prove accurate for Bitcoin, only time will tell.
The world’s most valuable and best known cryptocurrency, Bitcoin surged past $10,000 and $11,000 in a matter of hours Wednesday. But it was a wild ride with big swings in both directions, as it fell back below $10,000, diving 15% from its high of $11,377.33, according to CoinDesk.
Its highly publicized swings have raised eyebrows on Wall Street.
“It’s no wonder people are questioning whether this is a bubble,” says Craig Erlam, senior market analyst at Oanda, a foreign exchange firm with offices in New York.
Bitcoin backers view it as a currency and payment system of the future, as well as a new kind of investment. Believers say it’s an emerging alternative to the dollar, gold, stocks or bonds.
Bitcoin works off blockchain technology, akin to an anonymous digital ledger that is not regulated by any government or financial institution.
“Bitcoin is without a doubt the currency of the future,” says David Mondrus, CEO of Trive, a site that kills fake news using blockchain.
Skeptics say Bitcoin is impossible to value, wildly volatile and a speculative play that may never gain widespread acceptance. They disparage Bitcoin as a “fad,” a “fraud,” and a “bubble.”
On Tuesday, Jack Bogle, the founder of mutual fund giant Vanguard, was the latest high-profile investor to warn people to steer clear of it.
“There is nothing to support Bitcoin except the hope that you will sell it to someone for more money than you paid for it,” he said in a CNBC interview.
It took the digital currency just nine years to hit $10,000. The Dow Jones industrial average took 103 years to top the 10,000 milestone.
Bitcoin’s huge 2017 gain — a bumpy ride that included five rallies of more than 20% and four short-lived bear markets, or drops of 20% — even dwarfs the Nasdaq’s 86% rise in 1999. That run ended with the bursting of the Internet stock bubble.
So, is Bitcoin a bubble, or the leader in a new type of investment with a bright future?
IT’S A BUBBLE!
Skeptics say Bitcoin mania will end badly.
Its skyrocketing price has similarities to the 1990s tech stock boom, says Brad McMillan, chief investment officer at Waltham, Mass.-based Commonwealth Financial Network.
“Everyone wanted tech stocks in 1999 and were willing to pay any price to get them with no regard for the underlying value,” he says. “When demand slackened, so did values. I suspect Bitcoin is in the middle of the same ride.”
Investors betting on Bitcoin, McMillan says, are hoping it will retain the top position in digital currency and become the next Amazon — not dot-com stock flameouts such as Pets.com and Myspace. There are now more than 1,325 digital currencies, according to coinmarketcap.com.
No matter what, though, Bitcoin is unlikely to disappear as the blockchain technology it relies on “has the potential to be as disruptive as the Internet was and is,” he says.
Bitcoin is more of an investment — albeit a “highly speculative one” — than a currency, says Axel Merk, president and chief investment officer at San Francisco-based Merk Investments. It fluctuates in price far too much on a daily basis, sometimes as much as 10%, to be considered something akin to the dollar or the euro.
Bitcoin, Merk claims, has “all the hallmarks of a bubble.”
Signs of that include its fast-rising price beyond what many believe is reasonable, the belief that the price can only go up and media hype.
Perhaps the biggest criticism of Bitcoin is that it has no underlying value like gold or a house or a company’s hard assets, such as machinery and products.
“I think Bitcoin will eventually be worthless,” says Peter Cardillo, chief market strategist at First Standard Financial in New York.
BITCOIN IS HERE TO STAY
Backers say it has more room to run, although it will suffer big drops along the way.
Bitcoin’s story is just beginning, argues Thomas Lee, managing partner and the head of research at New York-based Fundstrat Global Advisors and one of the digital currency’s most vocal bulls.
Earlier this year, Lee said Bitcoin could reach $25,000 by 2022. The major reason for Lee’s upbeat outlook is that he believes Bitcoin will eventually earn widespread acceptance in the global financial community, according to a report published Wednesday.
Among the signs of that, he says, are CME Group’s plans next month to create options contracts for Bitcoin, which will better enable investors to manage its wild price swings, and a handful of big Wall Street banks expressing interest in creating Bitcoin trading platforms. The Nasdaq also confirmed Wednesday that it aims to launch Bitcoin futures in the first half of 2018.
All these things are “making it easier to own Bitcoin,” Lee wrote.
Still, he warns that Bitcoin will be prone to drops of 30% to 40% along the way.
Another thing working in Bitcoin’s favor is its limited supply, notes Thorne Perkin, president of New York-based wealth management firm Papamarkou Wellner. There are 16.7 million Bitcoins in circulation, which is still below its maximum number of 21 million units.
“I’m a big believer in Bitcoin long term,” Perkin says, adding: “Expect some wild volatility in pricing. A meaningful pullback is overdue. But Bitcoin is here to stay.”