World Economy

Bitcoin’s Unrealistic Price Rise Could Burn Investors

Bitcoin is becoming integrated into the world of finance.Bitcoin is becoming integrated into the world of finance.

Matthew Lynn, a Bloomberg columnist, warned in Moneyweek that bitcoin’s rapid price rise makes it a bubble that could have ramifications for the entire economy.

Lynn said it makes sense that bitcoin’s price should rise as it establishes itself as a mainstream currency. But he takes issue with the amount of the rise: 800% in a year, a quadrupling in just over six months and an 87% gain in a month, reported.

He says this is not a normal price rise for an asset. A couple hundred years of financial history indicates this type of rise is a bubble and its impact will matter to more than the few people who own bitcoin.

For one thing, the bubble will bring overinvestment. Entrepreneurs will lure investors into crypto currency startups.

Lynn compared the bitcoin bubble to the dotcom bubble in which a lot of capital was wasted that could have been better deployed elsewhere.

The bubble also indicates manias have returned to the financial markets thanks to the long bull run. In any bull market, there are assets that Lynn said “goes crazy”. The last time this occurred, sub-prime mortgages were the crazy asset.

Prior to sub-prime mortgages, Internet stocks went crazy. Everyone piled in and the prices skyrocketed. In the case of the Internet bubble, asset prices indicated the market had become detached from reality and was going to collapse.

Crypto currency has not become a huge form of money and has not yet registered in relation to global capital markets, Lynn noted. But it is becoming integrated into the world of finance. And once one part of the monetary system wobbles, the entire edifice becomes weakened, which is what occurred in 2008 and 2009.

Lynn said it is unknown what contracts and derivatives have been linked to crypto currencies or how deeply they have integrated into the financial system. This will become evident when a crash occurs. The losses connected to the crash could ripple in unexpected ways.

Bitcoin began September by approaching $5,000, following up on a record-breaking run in August spurred by optimism that faster transaction times will hasten the spread of the crypto currency.

The largest digital tender has surged on the acceptance of a plan to quicken trade execution by moving some data off the main network. The solution—termed SegWit2x—had been so contentious that a new version of the asset called Bitcoin Cash was spun off in opposition.

Add new comment

Read our comment policy before posting your viewpoints