MacroscopeWhy warnings of a dangerous bitcoin bubble are misleading

In the annals of the great financial bubbles, the cryptocurrency is unique, having bounced back after a series of crashes and continuing to set new highs

There is increasing institutional interest in bitcoin despite the intense volatility

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A technician inspects bitcoin mining rigs at Bitfarms in Saint-Hyacinthe, Quebec, Canada, in March 2018. Photo: AFP

Published: 3:15pm, 22 Apr 2021Updated: 3:15pm, 22 Apr 2021

The past week has been a kick in the teeth for bitcoin, the dominant cryptocurrency, and its growing band of believers. On April 14, shares in Coinbase Global, which operates the largest digital coin exchange in the United States, began trading on the Nasdaq Composite index, giving the company a market capitalisation of US$64 billion and helping add transparency and credibility to crypto assets 12 years after the creation of bitcoin.

Yet, since Coinbase went public, bitcoin’s share price has fallen almost 16 per cent, and at one point was down 20 per cent from its peak on April 16. Given that Coinbase’s listing was supposed to be a moment of validation for the nascent crypto asset class, the sharp sell-off in bitcoin is troubling.

For crypto sceptics – a large and diverse group that includes regulators, prosecutors, environmentalists and most professional investors – the intense and persistent volatility is just one of several oft-cited reasons bitcoin will struggle to gain mainstream acceptance as an asset class.

For starters, the use of bitcoin – which currently accounts for 51 per cent of the US$2 trillion market capitalisation of all crypto assets – in everyday transactions is still very limited. Although storing and using the digital coin is easier than it was several years ago, widespread adoption is a long way off.

Moreover, the more bitcoin makes inroads with investors, the more it comes under pressure from regulators. Last week, the central bank in Turkey, whose own currency is acutely vulnerable, said it would ban the use of digital coins for payment on the grounds that the anonymous use of the tokens increased the risk of “non-recoverable” losses.

What is more, trading in bitcoin is driven entirely by speculation as opposed to fundamentals. Indeed, even as an investment vehicle, the argument that bitcoin can seriously compete with gold as a store of value rings hollow given that it has become increasingly correlated to risk assets.