For years, Adam Malolepszy had resisted the urge to bet on cryptocurrency, telling his friends it was a “bubble waiting to burst”.
- Bitcoin climbed above $US50,000 on February 16
- It surged to record highs after endorsements by Tesla, Paypal, Square, Mastercard and BNY Mellon
- Tesla CEO Elon Musk warned that cryptocurrencies should be treated as “speculation”
Then in mid-December, the infamously volatile bitcoin surged to a (then) record high of $US20,000.
Bitcoin kept hitting fresh records almost every week afterwards. It crossed $US30,000 just after New Year’s Day, then $US40,000 in less than a week, before plunging 25 per cent by the end of January (and now it’s sharply higher again).
The extent of this “crypto bubble” made no sense to the 26-year-old computing student, who used to work in the finance industry.
But he finally embraced his fear of missing out (“FOMO”) a fortnight ago.
That’s when he decided it was time to invest in bitcoin, dogecoin (for “fun”), litecoin, ethereum, XRP, tron and other smaller digital currencies — amongst more conventional investments like shares and exchange traded funds (ETFs).
“The volatility is insane — it’s a market that’s home to just so many speculators that make it hard to determine what the price should actually be,” Mr Malolepszy told ABC News.
Most punters didn’t seem to share his concerns last week, as bitcoin prices shot through the roof after Tesla said that it had bought $US1.5 billion worth of the digital currency and would soon let customers purchase its electric cars with the volatile digital currency.
However, Tesla has not disclosed how much bitcoin it purchased, and at what price.
On Tuesday, bitcoin climbed to its most expensive level ever ($US50,585) late in the evening. But it has since fallen again, trading around $US49,115 on Wednesday morning AEDT.
“I’m now starting to realise there’s some underlying value [in cryptocurrency] by the fact that so many people are supportive of it and believe there’s a future for digital currencies,” Mr Malolepszy said.
To an extent, the fear of “missing out” drove Tesla’s decision to speculate on bitcoin.
It followed the footsteps of payments giant PayPal — which said, last October, that it would allow users to buy and sell cryptocurrencies on its ubiquitous payment platform.
That month, Square also announced it had bought 4,709 bitcoins, for around $US50 million. It was a huge sum of money at the time, but in hindsight pales in comparison to Tesla’s $US1.5 billion bet.
However, Tesla’s eccentric boss Elon Musk has made it clear that he views cryptocurrency as “speculation”.
On February 7 (the night before Tesla revealed its massive bet on crypto), Mr Musk was on his way to have dinner with his children at an upmarket steakhouse in West Hollywood.
Before he reached its front door, he was intercepted by a legion of adoring fans — who demanded autographs, while peppering him with questions about the cryptocurrency market.
The world’s richest man had been talking up bitcoin, along with a “joke” currency called “dogecoin”, which has surged about 900 per cent since the year began.
There were signs that Mr Musk was worried that some of his fans might be taking his recent crypto jokes as genuine investment advice.
“People should not invest their life savings in cryptocurrency, to be clear — that’s unwise,” Mr Musk said, in his clearest warning yet.
“There’s a good chance that crypto is the future currency of Earth, and it’s like … which one’s it going to be? Maybe it’ll be multiple.
Mainstream backers join the bandwagon
Mastercard is fully aware of the speculative nature of bitcoin, but sees it as an opportunity to expand.
“Whatever your opinions on cryptocurrencies — from a dyed-in-the-wool fanatic to utter sceptic — the fact remains that these digital assets are becoming a more important part of the payments world,” the credit card giant wrote on its website on February 10.
“We are preparing right now for the future of crypto and payments, announcing that this year Mastercard will start supporting select cryptocurrencies directly on our network.”
Last week, another big announcement on crypto was made by America’s oldest bank, BNY Mellon.
The company (formerly called the Bank of New York) said it had formed a new division to help to buy, sell and hold crypto — and its services are expected to be offered later this year.
Also boosting the value of bitcoin are some optimistic forecasts from investment banks like JP Morgan (which sees it surging as high as $US146,000 in the long term) and Citi (which forecast it could hit $US318,000 by year end).
Not a bad comeback for an asset which crashed below $US3,200 (from a peak of around $US19,000), when its first ‘buying frenzy’ died down about two to three years ago.
This flurry of bitcoin endorsements from major US companies in the past four months has pushed the market value of all cryptocurrencies beyond $US1.5 trillion.
Bitcoin makes up the bulk of that total, with a market capitalisation of $US916 billion.
Bitcoin pub crawls
Despite its name, very few people are actually using bitcoin as a currency to make purchases. Most people are holding onto them, hoping their value will continue to skyrocket.
Sydney bar owner Ben Shute believes the high transaction fees are a major factor behind this.
He said it had been a long time since a customer had spent any bitcoin at his venue, Spawn Point, which may be the last bar in Sydney which takes crypto payments.
“I do remember a bitcoin pub crawl. It was like a social group for a while.
“They only went to bars that accepted bitcoin and they had one round of drinks, paid with bitcoin, and then moved onto the next bar that took bitcoin.
“That was quite cool. I haven’t seen that for years, though.”
Bitcoin backers call it “digital gold”, as most of its buyers treat the cryptocurrency as a store of value (despite its extreme price fluctuations every day).
Art gallery director Ian Geraghty doubts many people will buy Tesla cars with bitcoin.
For the past few years, he has offered bitcoin as a payment method to give his foreign clients (from the United States, Britain, China and Japan) an extra payment option — if they choose to take it up.
However, no-one has bought any paintings with bitcoin from his Sydney gallery, Filter Fine Art.
“It’s quite a niche method of payment. Not that many people have bitcoin at the moment, and art is quite niche as well.
“I’d be surprised if any artwork in Australia had been paid for in cryptocurrency.”
‘Digital gold’ in unstable times
Bitcoin’s rising popularity also coincides with governments and central banks across the world making desperate attempts to stimulate their economies out of COVID recessions.
They have done so, in the last 12 months, by slashing interest rates to zero (or negative territory), printing trillions of dollars’ worth of cash (also known as quantitative easing) and causing government debt to skyrocket.
Investors are betting the US government could soon inject up to $US1.9 trillion worth of further stimulus into the pandemic-ridden US economy.
Supporters of bitcoin have long trumpeted the idea that cryptocurrencies are “digital gold” which serve as a “hedge against inflation”.
“There are many factors that play into it, particularly if we talk about [bitcoin] as a deflationary asset,” said Caroline Bowler, the head of BTC Markets in Melbourne.
“There’s also the knowledge that there will only be 21 million bitcoin that ever get mined.
“It gives stability, which is a nice counterpoint to the times we’re living in, which are notoriously unstable at the moment.”
She also said there has been a significant rise in the number of investors and a “20 per cent increase in average trade size” at her cryptocurrency exchange.
“We’ve certainly seen a buoyant market over the last six months and it doesn’t look like it’s going away any time soon.”
‘Silly behaviour’ abounds
Some market analysts warn that investors are seriously underestimating the risk of their cryptocurrency portfolios suffering a massive correction.
“We live in a huge global bubble in all financial assets at the moment, and there’s a lot of silly behaviour taking place,” said Rabobank’s global strategist Michael Every, based in Singapore.
“Too much of it is ‘FOMO’, or just chasing after a crowd. In the old days, if there was a queue, you tended to join it because you think there might be something good at the end of it.”
Mr Every said there was a small risk that bitcoin’s value could plunge as a result of government decisions worldwide — but stressed that “zero” was not his forecast.
“That risk is baked into the cake when you look at what the political structure is.
“You actually have governors from the US Federal Reserve, European Central Bank, and several other major central banks either banning it already, or saying, ‘We think it’s being used for money laundering and criminal activity,’ and talking about introducing their own digital coin.”
He also said there was a risk that some nations might introduce their own digital currencies in the future, which would lead to an existential crisis for bitcoin and other cryptos.
“What’s the point of having a cryptocurrency? I think they would all want to control their own one and have a monopoly over it.
“And then you’ve got a far bigger downside risk once the price has gone even higher from here first.”
You can watch this story tonight on The Business at 8:45pm AEDT on ABC News or iView.