What’s going on?
For one, Facebook’s announcement that it is planning its own virtual currency, Libra, for its billions of active users should lift the profile of bitcoin, as well as its peers, such as ethereum or litecoin. At least that’s the hope.
Investors are also drawing parallels between gold and bitcoin – the precious metal and “ultimate store of value” has also jumped and now trades at six-year highs.
Indeed, bitcoin enthusiasts refer to it as “digital gold”.
To some degree this is fair: both are alternative currencies and sit outside the reach of central bank manipulation, at a time when the guardians of fiat currencies are flagging a renewed round of extreme monetary policies.
Of course, it doesn’t help when the US President says the Federal Reserve “doesn’t know what it is doing”, as he recently opined on Twitter.
Honestly, though, this link between bitcoin and gold feels more emotional than anything else. In fact, you probably can’t think of two more unlike assets – one a new and flighty virtual currency which is digitally “mined” at a rate determined by a computer algorithm, and the other a millennia-old embodiment of tangible value.
Indeed, if bitcoin represents anything, it is as the purest expression of FOMO – or “fear of missing out”. There are few things more excruciating than watching your neighbour get rich. This is a market clearly driven by massive speculation. The lack of institutional involvement means retail investors and momentum-chasing rules the day.
Which begs the question: what is bitcoin really worth? Are there reliable ways to value it?
Analysts at JPMorgan reckon the best way to determine bitcoin’s intrinsic value is to treat is as a commodity – it is “mined”, after all. And that uses electricity. Electricity costs money, so it makes sense that people will be incentivised to mine more bitcoins for as long as the price is above the marginal cost of producing those coins.
The problem with this: it’s probably bunkum. Bitcoin is designed to be used as a medium of exchange: for easy and cheap transacting across borders, remitting money back home, buying coffees, that kind of thing.
Its true value
Which means beyond the hype and the hope, the greed and the fear, the true value of bitcoin and its fellows will ultimately be driven by the degree to which people use them, Pepperstone’s resident Millennial bitcoin expert Sam Holman reckons.
Daily transaction volumes in bitcoin have reached annualised levels of about $US1 trillion, near all-time highs, Holman says. Compare that to the big payment systems like Mastercard and Visa, which have annual volumes of $US4 trillion and $US8 trillion, respectively.
But how do you actually buy bitcoin? This journalist wanted to find out. No surprise, it is very easy.
First you download an app such as Coinbase, which is the largest of its type in the US and apparently 100 per cent legit. Then you verify your identity by using the app to take pictures of the front and back of your licence. Add your credit card details and you are ready to go.
So it was that in, probably, about 10 minutes I had spent $50 buying 0.00282615 of a bitcoin, worth $47.76. That included a $1.99 transaction fee.
A hour later it was worth $48.43.
“It’s difficult to pinpoint where [bitcoin’s price] will stop or where it will go,” Holman says. “It’s hard to gauge how far this rocket will go.”
Whatever: I’m riding this thing all the way to the moon.