Bitcoin tops $51,000. What's the matter? - In Spanish - Chicago Tribune
AdvertisementAdvertisement By Sam Wood, The Philadelphia InquirerTribune News Service | Feb 17, 2021at2:23 PM
Bitcoin, the world's largest digital currency, topped $50,000 on Tuesday and Wednesday, shocking finance professionals who dismissed it as a fad.
The value of bitcoin has quintupled in the last year alone. On February 16, 2020, it was trading at just under $10,000. By Wednesday it had surpassed $51,000.
advertisementSo what drives the market? We asked experts like Zach Seward, editor-in-chief of Coindesk, who writes about digital currencies; Mario Guillén, Professor of International Management at the Wharton School of Business at Penn, and Michelle Lowry, TD Bank Professor of Finance at the LeBow School of Business at Drexel University.
What is bitcoin?
Bitcoin is a virtual currency, created 12 years ago, as an alternative to the government-issued “medium of exchange” we know as cash. It has a function similar to that of a “store of value” like gold. But unlike the precious metal, you can't store bitcoin or turn it into jewelry. It exists only as an electronic file. Transactions are recorded in a distributed and decentralized ledger. So if you lose the web address of your bitcoin, it will be gone forever. No government regulates it.
advertisementBitcoin can be used to buy many things anonymously, from Tesla cars to illegal items on the Dark Web. And unlike the dollar, there is only a limited amount.
How do you buy bitcoin or another cryptocurrency?
The easiest way to buy crypto is through a centralized exchange, such as Coinbase, Binance, or Cashapp. Each charges a small transaction fee and generally accepts credit cards for payment. There are also bitcoin ATMs dotted around the region that accept cash for bitcoins.
What is the disadvantage of cryptocurrencies?
There are many negative aspects to consider before buying digital currencies. If you want to use it to buy something, bitcoin, Lowry points out, has very long processing times. “A transaction can take up to 10 minutes. Other major platforms (credit cards, Venmo, and Paypal) take seconds.
Fundamentally, speculating on anything is gambling. Bitcoin is the darling of the crypto world now, but even if it gains more mainstream adoption, “it has never been clear whether Bitcoin will remain the dominant player here,” Lowry said.
“If you are interested and want to invest a small portion of your portfolio in crypto to diversify, you should be fine,” Lowry said. “But know that it is extremely volatile. Bitcoin has come a long way over the past year, but know that what happens next may not reflect the same price pattern. Be cautious. There may be parallels between this and the internet bubble."
Why is the price of bitcoin skyrocketing?
The spike in bitcoin's price has been triggered by "a broader worldview shift," said Zach Seward, editor-in-chief of Coindesk, the leading news site specializing in cryptocurrency news.
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“Large companies increasingly see it as a legitimate store of value,” Seward said.
Elon Musk, the billionaire CEO of Tesla, recently bought $1.5 billion worth of bitcoin and said his company will accept it as payment for its electric cars. Mastercard announced this month that it would support select cryptocurrencies on its payment network. Apple Pay said last week that it would allow citcoin to be spent online, in retail stores and in apps. BNY Mellon said last week that it would keep bitcoin and other cryptocurrencies for its clients.
Is there a precedent for the bitcoin spike?
In 2017, the price of bitcoin saw a similar surge when, during the year, speculators pushed bitcoin from roughly $1,200 to its then-high of $19,783. The “great cryptocurrency crash” followed with its value falling by 80 percent. It languished below $10,000 until July 2020 when Bitcoin began to pick up steam, fueled by concerns about the federal stimulus program and fears of inflation.
“This uptick is very different from 2017 in that it is very much driven by institution adoption,” Seward said. “Look at Massmutual, a huge old insurance company that bought $100 million worth of bitcoin in December. The real pioneers are MicroStrategy, a publicly traded company whose CEO Michael Saylor has bet heavily on bitcoin as a treasury asset. They have something like $3 billion.”
When there are big names moving into the cryptocurrency space, “nobody wants to miss out,” said Lowry, a finance professor at LeBow. “Now there are big institutional investors and retail investors who hear about this and have a little bit of FOMO going on, afraid of missing out.”
But bitcoin's recent history should also serve as a warning, Lowry said.
advertisementAn academic paper in the Journal of Finance concluded that half of bitcoin's price increase in 2017 was related to manipulation, Lowry said. "And that should be enough for everyone to pause right now."
Are there other causes for the rise of bitcoin?
Mario Guillén, a professor of international management at Wharton, said that the fascination with cryptocurrency is also being driven by interest rates.
"A lot of people have a lot of cash and are getting low returns on their other assets," Guillen said. “There is a lot of liquidity and very, very low interest rates. That has contributed to the demand.”
Unlike US currency, which the federal government can print in unlimited amounts, the amount of bitcoin is limited.
“We have a lot more money printing from the government and that increases the risk of inflation,” Lowry said. “What you do as an institutional investor is hedge against it. That makes cryptocurrency a natural strategy. It has essentially zero correlation with any other financial asset, making it a valuable source of diversification.”
Are there alternatives to bitcoin?
Bitcoin is far from the only cryptocurrency. There are literally thousands of them. Bitcoin, however, is the best capitalized with a current market capitalization of $925 billion. Other popular virtual currencies include ether, litecoin, and monero.
Ether, in particular, has also seen a huge spike in price, going from roughly $260 last February to an all-time high of nearly $1,800 this week. Lowry points out that companies can also use ether to execute contracts.
Some cryptocurrencies are extremely limited in their trading applications. One that circulated a few years ago could only be used to make payments to dentists.
"Each currency has its own supporters," Seward said. “Bitcoin maximalists, for example, believe in bitcoin and only bitcoin.”
What is Dogecoin?
Another crypto, dogecoin was based on a popular meme. It was created in 2013 as a joke poking fun at the rise of cryptocurrencies. (Although it was trading for around a penny per dogecoin, its total market capitalization on Tuesday was a very real $6.6 billion.)
advertisementdogecoin began its recent rise to 8 cents on the dollar on February 4 after Elon Musk issued a series of cryptic tweets, unabashedly calling it “The Future Currency of the Earth”. Rapper Snoop Dogg and Kiss bassist Gene Simmons also weighed in and helped raise the value. Dogecoin crashed back to 5 cents after celebrities stopped tweeting about it.
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advertisement"Dogecoin is still a joke," Seward said. “But the landscape has changed, so it's no more of a joke than GameStop or AMC's actions. The world has caught up with the absurdity and surrealism of the cryptocurrency markets. It's crazy."
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