Bitcoin’s all the rage with millennials but it’s certainly no passing fad
Cryptocurrency mania has its roots in growing anti-establishment sentiment which, in the current political climate, could turbocharge speculative interest for a considerable period of time
In the financial markets, 2017 will be remembered as the year when volatility collapsed, Europe appeared to have bucked the trend of anti-establishment populism and, in the last two months of the year, the bitcoin craze reached fever pitch.
Since mid-November, it has been all about bitcoin, the largest of the so-called “cryptocurrencies”, virtual currencies that have no physical form and operate on a peer-to-peer basis without a central repository, relying instead on a network of computers to verify transactions.
Last Friday, bitcoin plummeted nearly 30 per cent, its steepest daily decline this year, as part of a dramatic week-long sell-off that saw the digital currency fall almost 28 per cent from its peak of just below US$20,000 reached on December 17.
Other virtual currencies, such as Ethereum, the second-largest by market capitalisation, also dropped sharply, accentuating the highly volatile trading conditions in the cryptocurrency market. Even after Friday’s huge losses, the price of bitcoin has risen by an astronomical 1,350 per cent this year.
The speculative mania surrounding cryptocurrencies – and the decentralised and digitised technology known as blockchain which underpins them – has invited comparisons with earlier asset bubbles, such as the technology bubble which popped in 2000 and, going further back in history, the Dutch tulip bulb bubble in the 1630s.
Given the lack of oversight and immaturity of crypto-assets – bitcoin is traded on unregulated exchanges while the anonymous nature of virtual currencies expose the products to fraud and hacking - valuation and regulatory concerns abound.
Last week, Youbit, a popular cryptocurrency exchange in South Korea, a country which accounts for nearly 15 per cent of crypto trading volumes globally according to Citigroup, was forced to file for bankruptcy due to a cyberattack.
Meanwhile, Michael Novogratz, one of bitcoin’s most vocal champions, said last Friday that he was abandoning plans to set up a crypto hedge fund because he “didn’t like market conditions and wanted to re-evaluate what we’re doing”.
Still, while concerns regarding the security and sustainability of cryptocurrencies are likely to intensify, there is method in the bitcoin madness.
It is no coincidence that the two other market events 2017 will be remembered for – persistently subdued volatility and the perception among international investors that anti-establishment populism has reached a high watermark – are very much part of the bitcoin story, and are likely to keep fuelling the cryptocurrency craze.
At a time of remarkably low volatility in global equity and bond markets, the dramatic price action in bitcoin is generating huge interest in the nascent asset class which, just before last week’s sell-off, had a bigger market capitalisation than the 11th largest company in the benchmark S&P 500 equity index, according to a report by Morgan Stanley.
Despite significant doubts about bitcoin as a store of value and as a medium of exchange, the allure of the cryptocurrency has proved impossible for Wall Street to ignore.
Two of the world’s largest futures exchanges, the Chicago Mercantile Exchange and the Chicago Board Options Exchange, have just launched contracts for bitcoin futures products.
This has encouraged providers of popular Exchange Traded Funds to seek regulatory approval in the US for funds that would track bitcoin futures.
The launch of US-based bitcoin-focused ETFs would widen the base of small retail investors who have been driving the cryptocurrency trade.
According to Deutsche Bank, Japanese retail investors - who contribute significantly to Japan’s more than 50 per cent share of the global market in foreign exchange margin trading - account for some 40 per cent of the global bitcoin trade. Many of these investors, moreover, are in the 20s and 30s.
Make no mistake, bitcoin is all the rage with millennials.
This is because its decentralised and anonymous nature appeals to a younger generation which distrusts governments and public institutions. The bitcoin mania has its roots in – and is being driven by – growing anti-establishment sentiment which, in the current political climate, could turbocharge the speculative interest in cryptocurrencies for a considerable period of time. The euro zone may have been spared the political populism that engulfed Britain and the US last year, but the bitcoin craze is part of a widespread repudiation of the status quo.
This is not to say that bitcoin has solid foundations – far from it. It will remain a dangerously volatile and unregulated asset. After a brief rebound on Saturday, the crypto sell-off resumed on Sunday.
Still, bitcoin (and, more importantly, the blockchain technology behind it) is no passing fad as the launch of futures contracts attests. Even Goldman Sachs is setting up a cryptocurrency trading desk. Bitcoin should not be dismissed.
Nicholas Spiro is a partner at Lauressa Advisory