December 7, 2017 / 10:22 PM / 10 days ago

Breakingviews - Bitcoin looks like speeded-up unicorn hype

NEW YORK (Reuters Breakingviews) - Bitcoin’s meteoric rise is looking like speeded-up unicorn hype. A sheen of futurism, fear of missing out, a lack of fundamental value, and an inability of big backers to sell without crashing the market are factors pumping up the digital currency’s price.

A Bitcoin (virtual currency) paper wallet with QR codes and coins are seen in an illustration picture taken at La Maison du Bitcoin in Paris July 11, 2014. REUTERS/Benoit Tessier

The rise in value has been astonishing, from $8.74 when Breakingviews first wrote on bitcoin in 2011, to over $15,500 on Thursday morning. The trajectory has gone exponential in recent days, with the price surging by more than 20 percent in the past 24 hours.

It’s a much more rapid version of what happens with hot technology startups. Funding rounds ratchet the valuations higher and higher, with only increasing investor demand, the previous valuation and a distant promise of huge potential to guide them. That’s how Theranos, the upstart blood-testing firm, got to its peak valuation of $9 billion. Whereas bitcoin, in enthusiasts’ minds, will replace the dollar, Elizabeth Holmes’ brainchild was going to replace every unpleasant, cumbersome blood test with a single finger-prick.

The Theranos technology didn’t work, and its evaluation evaporated. Meanwhile, bitcoin’s continued buoyancy in fact undermines any potential usefulness. Holders have a hard time psychologically using their coins to purchase anything. In 2010, a software developer famously bought two pizzas for 10,000 bitcoins. Nobody wants to be the guy who paid over $150 million for lunch.

Crypto-currencies are, however, excellent vehicles for speculation. They have no objective value, so – like a startup – their worth is derived from the narrative of what has, so far, been a steadily rising chart. Demand is swamping supply. The value of all bitcoins is a bit over $250 billion, and volume hit a record $28 billion or so over the past 24 hours, according to coinmarketcap.com. The similarly sized SPDR S&P 500 ETF trades multiples of this on a typical day. The exchange-traded fund’s relatively small moves in value indicate much more balanced trading.

Big holders of bitcoin can’t, therefore, sell in any size without the risk of tanking the price – which could kill the momentum for good. They might want to think about doing so, though, to make sure they don’t get caught out by a rush for the door. The danger if bitcoin’s credibility is punctured is an accelerated, Theranos-like bloodbath.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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