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Bitcoin: Will the bubble burst?

There's nothing like a fast-rising market to attract interest. But when it comes to Bitcoin's latest meteoric rise, could history repeat?
By · 25 Feb 2021
By ·
25 Feb 2021 · 5 min read
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Bitcoin has climbed from $20,000 to over $60,000 in the past four months – gains that are seeing plenty of Australians tip money into the digital currency. Research shows 25% of Aussies own or plan to own cryptocurrency by the end of 2021[1].

A number of factors are behind the latest crypto craze. Super-low interest rates globally are encouraging people to explore alternative assets. The recent announcement that Tesla is getting into cryptocurrencies has undoubtedly spurred the market on. And for one in ten Australian Bitcoin buyers, FOMO – fear of missing out, is driving their decision.

What bothers me is a sense that we’ve seen this all before. Back in 2017, Bitcoin jumped from $1,300 at the start of the year to reach $24,000 by mid-December 2017. Those gains prompted Australians to invest close to $4 billion in Bitcoin. The problem was that almost half those trades were made in December just before Bitcoin crashed[2]. By early 2018, Bitcoin had plunged to a little over $10,000, and less than 12 months later it was worth around $4,000.

The concern with Bitcoin is that young investors are over-represented in the digital currency market. Millennials are 11 times more likely than over-50s to own or plan to own cryptocurrency[3].

That matters because one thing young investors have on their side is time – time to benefit from compounding returns. I’m not convinced Bitcoin will deliver on that score. In fact, we run the risk of a repeat of 2017, where latecomers to the market get their fingers burned.

While the supply of Bitcoin is ultimately limited, the overall supply of cryptocurrencies is not. In addition, digital currencies don’t deliver ongoing returns – other than speculative gains. The two together make it hard to put a real figure on their value. Add in a warning from the NSW Police Force and AUSTRAC that digital currencies are “fast becoming the preferred choice for organised criminal networks involved in money laundering, funding terrorism, and cybercrimes”[4], and the warning bells should start ringing.

Yes, the blockchain technology on which digital currencies are built has tremendous potential. Will it replace fiat currencies like the government-backed Australian dollar? Only time will tell.

What I can say is that highly regulated assets like shares and exchange traded funds, give investors opportunities to make their money contribute towards their goals in a straightforward and simple way.  The same can’t be said of Bitcoin, and I suspect it’s only a matter of time before this latest bubble bursts.  

Mind you, I am a dinosaur from a non-digital world, so I accept I could be wrong on Bitcoin. But I am certain that one key tip about money will always be true: If it looks too good to be true, it will be. Please take care with any investment that is highly hyped.

 

[1] https://www.finder.com.au/press-release-feb-2021-crypto-craze-4-8-million-aussies-to-own-cryptocurrency-this-year

[2] https://newsroom.accenture.com/news/australias-digital-currency-market-expanding-accenture-and-australian-digital-commerce-association-research-reveals.htm

[3] https://www.finder.com.au/press-release-feb-2021-crypto-craze-4-8-million-aussies-to-own-cryptocurrency-this-year

[4] https://www.austrac.gov.au/cybercrime-squad-and-austrac-remind-digital-currency-exchanges-reporting-obligations

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Frequently Asked Questions about this Article…

Bitcoin's price has surged from $20,000 to over $60,000 in just four months due to factors like super-low global interest rates, Tesla's entry into the cryptocurrency market, and the fear of missing out (FOMO) among investors.

While young investors have time on their side to benefit from compounding returns, Bitcoin's speculative nature and past volatility, like the 2017 crash, suggest caution. It's important to consider the risks and not just the potential gains.

Bitcoin's risks include its speculative nature, lack of ongoing returns, and potential for significant price volatility. Additionally, digital currencies are increasingly used in money laundering and cybercrimes, raising further concerns.

While blockchain technology has tremendous potential, it's uncertain if Bitcoin will replace fiat currencies like the Australian dollar. Only time will tell how digital currencies will evolve in the financial landscape.

After reaching $24,000 in December 2017, Bitcoin's price crashed to just over $10,000 by early 2018 and further dropped to around $4,000 within a year, highlighting its volatility.

Millennials are 11 times more likely than over-50s to own or plan to own cryptocurrency, possibly due to their familiarity with digital technology and a greater willingness to explore alternative investments.

Investors should be cautious of Bitcoin's speculative nature, potential for high volatility, and the fact that it doesn't provide ongoing returns. It's crucial to assess whether an investment seems too good to be true.

Highly regulated assets like shares and exchange-traded funds offer investors opportunities to achieve their financial goals in a straightforward and simple way, unlike the speculative nature of Bitcoin.