Misha Glenny is an award-winning journalist and broadcaster. He is the author of McMafia and DarkMarket: How Hackers became the New Mafia and a former UK Digital Security Journalist of the Year.
The trading simulator website, CryptoParrot, came up with some astonishing survey results towards the end of August. 65% of hedge funds dealing in cryptocurrency predicted that by the end of the year bitcoin could hit as much as USD 100,000. Another 21% of traders believe it is heading towards USD 150,000. If these breath-taking figures materialize, the digital currency will continue to set new historical records as an investment asset. If you had invested in bitcoin before the outbreak of the pandemic or, even more spectacularly, before 2017, you would have made a small fortune by now. For several years, the digital currency has seemed to be a license to print money.
The most common fallacy regarding the rise of bitcoin and other cryptos during the pandemic was to assume it was driven by criminality because of the convenience of use for those buying and selling illicit goods and services. In fact, the entry of huge institutional investors into all forms of so-called De-Fi or Decentralized Finance that drove not only standard cryptos but also the craze for Non-Fungible Tokens, a form of cryptocurrency that unlike bitcoin is unique (non-fungible). These investors arrived because the pandemic increased the uncertainty of traditional centralized financial markets.
Bitcoin’s extraordinary ride comes with a big health warning. In the past 18 months, a fiery debate about crypto — bitcoin in particular — has broken out among economists, libertarians, law enforcement, criminals, and other interested parties: Is crypto one big chaotic Ponzi scheme? Or is it central to the future of money?
The bitcoin phenomenon certainly demonstrates all the characteristics of one huge investment bubble. Central to that is the readiness of investors’ suspension of disbelief and their willingness to ignore danger signs barreling down the road. For the moment, however, although the value of the currency has come down from its highpoint in April 2021, its trajectory suggests it looks more likely to head north before it might come crashing down.
It took a long time for bitcoin to break out of the niche communities into which it was born in 2008. Over the next nine years, it fluctuated between less than 10 cents and USD 250 per bitcoin. 2017 saw the first major experiment with the currency by small-scale investors, which took it to around USD 20,000 for a short time. It then collapsed to around USD 5,000 dollars until the beginning of the pandemic when it started its meteoric rise, eventually hitting over USD 61,000 per bitcoin. Institutional investors are now the primary drivers of the currency’s values.
Before bitcoin revolutionized the world of crypto in 2008, there were a few attempts to establish a digital currency. E-Gold was an early mover but in the wake of the attack on the Twin Towers on 9/11, the US Department of Justice identified the electronic cash system as violating a number of anti-money laundering regulations. It was too easy to disguise its origin, move it around, and then cash out as hard currency.
Bitcoin’s creation was linked to another remarkable invention — blockchain technology. This system securely records transactions on a ledger (in bitcoin’s case it’s public but some currencies have a private system), which means that the entire transaction history of every bitcoin can be traced.
In theory that meant that criminals couldn’t use bitcoin because the cops would be able to track their dealings. It wasn’t long, however, before nefarious individuals devised ways of confusing anyone trying to monitor their activities. Later on, new currencies with much higher levels of privacy, such as the Russian coin Monero, came onto the market.
Bitcoin faces other challenges from more stable cryptos. But it remains by a huge measure the most popular with a market capitalization edging towards USD 1 trillion, which is more than double that of its nearest competitor, ethereum.
Some states like China and Turkey have cracked down on the use of bitcoin and other cryptos, which led to a depression in the market. Given that bitcoin was created precisely to avoid the regulation which states enjoy over fiat currencies, it is unsurprising that more countries around the world are now looking to curb these upstarts.
State regulation will come but it is proving to be relatively slow. Institutional investors are at the moment banking on the fact that the EU member states, the UK, and the USA appear reluctant to intervene in the market too brutally. And that is why investors are still keen to play this particular market. But watch out — because when the fall comes, it will be extremely painful for those who have not been hedging elsewhere.