The value of bitcoin, the digital currency that you probably just recently heard about, shot through the US$16,000 mark on Thursday. To put this in context: The currency broke through the $1,000 mark in February of this year.
If you've only recently come across it, bitcoin is a decentralized digital currency — there are no physical bitcoins, only ledgers stored in the cloud. No government controls the currency, and its use is anonymous. Bitcoins are created through software that "mines" them by solving time-consuming math problems. This is done to create scarcity, giving the currency value.
And what value it has: Bitcoin has seen a 16-fold increase in price in 10 months.
And the rate of growth is accelerating at a breakneck pace. Earlier this year it took a few months for bitcoin to add another US$1,000 in value; in the past day it's been adding that much every few hours.
Bet you wish you had bought some bitcoins a year ago, when they were trading under US$800.
But don't feel too jealous, because we're calling it, folks: This is a classic asset bubble. Prices are accelerating and are completely unsustainable. A correction is inevitable.
We're not the only ones saying it. Nobel prize-winning economist Joseph Stiglitz told Bloomberg that he sees bitcoin as "a bubble that's going to give a lot of people a lot of exciting times as it rides up and then goes down."
Stiglitz called for the cryptocurrency to be outlawed, because "it doesn't serve any socially useful function."
He's not the only one who's worried. Prominent financial experts such as Morgan Stanley's former chief economist, Stephen Roach, and Goldman Sachs CEO Lloyd Blankfein have warned that bitcoin is a big, fat ugly bubble.
But not everyone sees it that way. The true believers say bitcoin can still be worth much, much more. MGT Capital Investment CEO John McAfee predicted recently that bitcoin will soar to US$1 million by 2020. He and others point out that there will only ever be 21 million bitcoins mined, implying that their potential value could be very high.
Fear of missing out
That belief that bitcoin could be worth much more could be justified, or it could be another sign of the irrational euphoria that falls over markets when a truly lucrative bubble forms.
According to Dave Chapman, managing director of Hong Kong-based cryptocurrency exchange Octagon Strategy, bitcoin's rise is driven by the same thing that drives just about every speculative bubble: The expectation that prices will keep rising. Investors are experiencing "FOMO," or "fear of missing out," and are racing to invest before prices go any higher.
"There is admittedly a lot of speculation in this market," he said, as quoted at CNN.
Some news reports have suggested that demand in Japan and South Korea, particularly, is driving up bitcoin prices.
Part of what's giving investors confidence in the currency is the hands-off approach that governments seem to be taking to the currency, Chapman said.
Also, cryptocurrencies are quickly gaining legitimacy. Investors will soon be able to trade the currency on the Chicago Mercantile Exchange, and the NASDAQ exchange is planning to roll out bitcoin futures trading next year.
The Bank of Canada issued a report earlier this month on the potential of cryptocurrencies, and the possibility of governments issuing their own. Though it didn't land on either side of the argument, the report found some potential benefits to the move.
"With no transaction fees charged by the central bank, the benchmark [cryptocurrency] would probably be less expensive for merchants than cash and credit cards."
The million-dollar question for investors now is: When will the bubble burst?
"We are in the throes of a bubble market, and one of the characteristics of a bubble market is that there is no way to know when the bubble will burst," said Mick McCarthy, CMC Markets chief market strategist Mick McCarthy told CBC News.
Simply put, buyer beware.
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