Is the Crypto Bubble Going to Burst?

Even if you aren’t paying attention to Bitcoin and other cryptocurrencies, you might have noticed that their value plummeted last week, with the total value of the market tumbling from a high of $US3 ($4) trillion last year to about $US1.5 ($2) trillion in a matter of days. Bitcoin, the most famous and largest cryptocurrency, saw its value go from $US69,000 ($95,786) to a low of about $US33,000 ($45,811). This means if you invested in Bitcoin or any cryptocurrency recently, chances are you just took what experts call “a bath.”

But this isn’t unusual. Cryptocurrencies are volatile and always have been — in just the last 12 months there have been two massive slumps in the value of Bitcoin. This is one reason crypto enthusiasts are always telling each other to HODL (hold on for dear life). These dips aren’t unexpected, and the value usually claws back to new heights eventually.

With this latest volatility, however, some are questioning the fundamentals of crypto, especially the claim that it’s a good “safe harbour” hedge investment like gold. Safe harbours are supposed to be resistant to inflation and market volatility, though. Goldbugs love gold because its value holds steady even when other markets are doing flips. The same can’t be said for Bitcoin and the other 17,000 or so cryptocurrencies on the market.

Where does crypto’s value come from?

Cryptocurrency is difficult to understand because it’s essentially just computer code. Every cryptocurrency is built on what’s known as a blockchain, a truly nifty piece of code that tracks transactions in an incredibly secure, public way. This makes tampering with the transaction record almost impossible, but also offers anonymity and privacy.

The main reason cryptocurrency has any value is because people say it does, and the people saying it does are mostly the folks who have large crypto positions, so they’re not exactly objective. Bitcoin is the biggest cryptocurrency in the world, but it’s still very difficult to buy anything using it, and its volatility makes it really difficult to use as a currency. The fee structures around crypto transactions are also incredibly volatile and difficult to predict, which makes every move you make in the crypto world an exciting (and often expensive) adventure.

And then there’s the climate impact. Bitcoin is designed to be limited in supply. New Bitcoins are “mined” by solving complex equations. All this required was a home computer when the cryptocurrency launched in 2008, and new coins were mined pretty quickly. But as more coins are minted, it gets harder to mine new ones — so hard, in fact, that Bitcoin now uses up more electricity than some small countries. And its power demands are only going to get worse. This is not only a terrible way to produce anything, the costs in terms of finances and climate impact are becoming increasingly concerning, undermining faith in cryptocurrencies going forward. No wonder El Salvador, the only country using Bitcoin as legal tender, contemplated building a mining operation on top of a volcano.

And finally, many countries are poised to rain on crypto’s parade. Russia’s central bank is probably going to ban crypto, China already has, and in the U.S. the Federal Reserve seems ready to wade in with its own cryptocurrency — but experts are divided on whether this would bolster the market or kill it entirely. Crypto’s association with criminality (both in terms of the rising scams luring naive investors to their doom and its popularity with criminal gangs, who like the anonymity) almost assures that at some point, governments are going to start creating — and enforcing — a lot of regulations around them, which doesn’t bode well for their future growth.

Should you invest in crypto?

Crypto seems more and more like a massive bubble that’s going to burst eventually, so the fundamental advice around whether or not to invest in crypto is to regard it as a form of gambling — even more so than the stock market. With stocks, you’re always taking a chance, but at least there is real, definable information you can use to make decisions. Yes, you might get the price of concentrated orange juice futures wrong and see your investments melt away, but at least your guess was educated. With crypto, there’s simply no way to predict anything. There’s zero data. Bitcoin might soar to $US100,000 ($138,820) tomorrow, or drop to $US10,000 ($13,882). No one knows. And worse, there’s no way to know.

That means you shouldn’t invest any money into crypto you can’t afford to lose. Consider the story of Mark Cuban, billionaire and co-star of Shark Tank. He’s a guy who regularly tells people what they should be doing to be successful in business and finance, but he lost $US200,000 ($277,640) trying his hand at a form of crypto investing called “yield farming,” where you buy crypto “tokens” and lend them back to the platform to earn interest. As he told the New York Times, “I should have done more homework on it.”

Bottom line: The crypto bubble may not burst today or tomorrow, but it’s too volatile to risk with your rent money.