Bitcoin: Will the bubble burst?

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.