Bitcoin, the world's leading cryptocurrency, has had a remarkable recent rally, breaking through the $35,000 price barrier in the early days of 2021. Even the coin's brief midweek stumble should not mask the enormity of its climb in the past few weeks.
Its value stood at barely $11,000 in October, meaning if you'd hopped on board back then, your stake would look very good today. This autumn cryptocurrency rally has proved a boon for investors in other digital currencies too, such as Ethereum, which have rapidly appreciated in value in 2021.
But there is something troubling that is knotted deep within this narrative.
Market analysts sometimes refer to Bitcoin and other cryptocurrencies as being notoriously volatile, which seems to be the kind of language an estate agent might use when trying to sell a property perched on the side of a not quite inactive volcano. JP Morgan warned this week of “headwinds” approaching for the largest cryptocurrency, as reported in Bloomberg.
The firm also called out an apparent bout of “speculative mania” as the main force that had pushed the price of Bitcoin up from below $5,000 in March 2020 to its current peaks.
As a matter of historic record, the cryptocurrency slumped to that 2020 low on the same March day the World Health Organisation declared the coronavirus crisis a pandemic, which seemed to cast the crypto as a mainstream asset that was responding in typically downbeat fashion to the black clouds that were gathering around the world.
The embrace of Bitcoin since then is partly attributed to it being seen as an alternative safe haven to gold in the face of that general uncertainty, despite its historic wild swings in price and broader concerns over significant hacks.
Even though the big idea of crypto is hugely appealing – it is a decentralised payment system that is beholden neither to central banks or governments – very few people have found a use for it as a currency to transact with or as part of their day-to-day lives. For now, and perhaps for years to come, it is a tool for speculation rather than an instrument of spending.
It is easy to make the case that the Bitcoin rally fits the profile of a classic bubble: the price is booming, more investors are moving into the market to buy a thing they don’t necessarily understand, driven by a variety of impulses including simple fear of missing out and just plain profit hunting. Greed and fear tend to inhabit the same space when a correction is on the horizon.
Few have a sensible explanation as to where the price may settle or historically could expound on why it dipped back to $5,000 or tracked beyond $35,000 on Wednesday. JP Morgan’s strategists also noted that Bitcoin’s price may soon be pushed up to between $50,000 and $100,000, but that “such price levels are unsustainable”.
For now Bitcoin beats on against the tide of sense and reason, neither a currency people truly transact with nor a financial system that empowers a decentralised commercial world.
Writing on these pages last week, columnist Mustafa Alrawi provided a robust commentary on why we shouldn't fall into the trap of saying the 2020s will herald a return to the Roaring Twenties a century ago, when a post-pandemic, post-Great War world began a decade of prosperity. Readers will not need reminding again that the decade ended badly with the Great Crash precipitating an economic depression and even the rise of fascism in Europe.
There are, of course, many reasons why people cast back to a century ago to seek answers today. Decades of mythologising the 1920s have polished its reputation as one of impossible glamour, great literature and, above all, good fun.
As James K Galbraith noted in the foreword to a 2009 edition of his father's definitive work on Wall Street, The Great Crash 1929, speculative investment made people "very happy" at the time. "Millions thought they could easily become rich, and some did," he writes, while also noting that "hope, credulity and carefree optimism" were the best parts of the boom of that decade.
The Bitcoin and crypto rally differ greatly from what happened a century ago, not just because any correction in price is unlikely to precipitate a wider economic crisis. Indeed, it is more likely to resemble the dotcom bubble of more recent decades in the sense that a period of intense speculation will be followed by a steep but relatively short correction. What it might do, however, is maroon plenty of smaller investors enticed by tales of huge profits for the taking.
There is one more reason why we should all be going cold on crypto: there is not much fun in sitting on a volatile asset. Even rollercoasters stop being enjoyable if you get to ride them all day every day. There is, in essence, a distinct lack of Galbraith’s hope and carefree optimism where crypto is concerned. Quite the opposite, in fact, just a grinding sense of "Fomo".
So, if like me, you have a hunch that cryptos may fall as quickly as they have risen, it may be time to sit this one out. The Roaring Twenties sounded like a lot of fun until the party ended. I’d settle for the boring Twenties of growth and certainty this time around.
Nick March is an assistant editor-in-chief at The National
