Bubble, boom, or both: Bitcoin hits dizzying new highs

On 22 May 2010, one Laszlo Hanyecz made an unprecedented transaction buying two Papa John’s pizzas with Bitcoin. The cryptocurrency was then virtually unknown outside a few techie circles and for the two pizzas worth around $41 Hanyecz paid ₿10,000. One Bitcoin was worth about $0.0041. Yesterday, the price of one Bitcoin hit over $34,000. 

In a sign of the incredible volatility of this increasingly popular asset, the price subsequently crashed to below $29,000 but it has since rallied and at time of writing was hovering around the mid-$32,000 mark.  

Still, even at a price thousands of dollars below the high-water mark, Bitcoin’s trajectory has been astonishing. At yesterday’s peak, Bitcoin’s value had, in just over ten years, increased roughly 8,000,000%. As recently as this time last year Bitcoin was only worth a bit over $7,000, meaning in just over twelve months its value has more than quadrupled. 

So, what happens next? 

One likely option seems a spectacular crash. Bitcoin has seen massive rallies followed by enormous crashes before. Most notably in 2017 Bitcoin’s value exploded, rising from around $1,000 at the start of the year to over $18,000 at its December peak, only for the bottom to drop out, the price falling to just over $6,000 in February 2018 and declining further to under $4,000 by the end of the year. 

Many orthodox economists have long dismissed Bitcoin as a quintessential financial bubble and the massive appreciations in value of the sort we have seen this year are rarely sustainable. Furthermore, as its critics have long pointed out Bitcoin neither has any inherent value nor is it particularly practical as a means of exchange given the limited number of venues willing to accept it as currency. Its value is purely in the eye of the beholder, fuelling the cryptocurrency’s massive volatility. 

As such, Bitcoin’s current dizzying highs could just be seen as so much market froth. Quantitative easing measures used globally to combat the effects of the pandemic means a great deal of money is washing around. Meanwhile, interest rates are rock bottom making bonds – usually a sponge for excess liquidity – not terribly attractive, pushing investors desperate for returns into ever riskier or more unusual assets.  

As Ollie Crow, a professional equities trader who actively traded Bitcoin on a personal basis, puts it: “Everyone has been pushed up the risk scale. If you used to trade bonds you now trade equities. If you used to trade equities you now look at options, derivatives, or crypto.” 

Framed more positively, this is a story not of irrational exuberance but of Bitcoin gaining wider traction. Just this week Aviva and Cantor Fitzgerald teamed up to offer a service letting people place their pensions in exchange-traded funds tracking Bitcoin’s price. An increasing number of reputable funds such as ARK Investment and Horizon Kinetics are also holding Bitcoin as part of a wider portfolio.  

Bitcoin’s order book reflects this, showing big limit orders – instructions to buy or sell set quantities of Bitcoin when it hits a particular price. The scale of the jumps in sales and purchases at certain points look too big to be driven by anything other than big institutional players, rather than retail investors who have traditionally driven a lot of the currency’s growth. 

According to Crow, these developments could do a good deal to make Bitcoin more viable in the long-run. “The sentiment relative to 2017 is totally different. In 2017 it felt like mania, or the tulip bubble. Now orders have a scale and depth we haven’t seen before. I also remember 2017 being a lot more volatile – though of course Bitcoin is still incredibly volatile compared to almost any other asset.” 

If this is the case Bitcoin’s breakneck rise could continue apace. Back in November, Cathie Woods, the founder and CEO of ARK Investment, suggested that if adoption of Bitcoin becomes ubiquitous among financial institutions its value could even hit the $400,000-500,000 range. As she sees it, Bitcoin’s value, like gold, could mainly derive from its ability to act as a hedge against inflation – and loose money globally is already stoking inflationary fears. 

In the long run, Bitcoin may yet find a place in the financial system as a store of value. However, its practicality as a medium of exchange seems limited by its volatility. Few people now, one suspects, will be willing to spend their Bitcoin on pizza…