Bitcoin investors have profited handsomely by ignoring the advice of some of the financial world’s most prominent figures, including JPMorgan Chase (JPM) CEO Jamie Dimon, whoand Warren Buffett, who likens it to a “mirage.”
While that view may ultimately prove correct, with even buyers of the digital currency warning of a bubble, the value of Bitcoin continues to soar into the financial stratosphere. Bitcoin prices hit an all-time high of $5,829 on Friday and jumped nearly 500 percent since the start of the year..
Bitcoin’s market capitalization as calculated by CoinMarketCap is more than $95 billion — that tops the market value of Goldman Sachs (GS) and Morgan Stanley (MS), two of Wall Street’s biggest players.
The jury remains out on how long — or if — the good times will last given the unpredictable nature of the market for digital money. One reason for the latest run-up in Bitcoin are rumors that China will reverse its recent decision to ban cryptocurrency exchanges. Fans of the currency also note that it is gaining more acceptance with consumers, witharound the U.S.
But Kevin Werbach, an associate professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School of Business, sounds a note of caution, and contends that the price of Bitcoin is being fueled by “speculation and, quite likely, by manipulation through some of the exchanges.”
“Speculative bubbles always go up until they pop, but no one can be sure when that will be,” he said by email. “There’s no good reason why cryptocurrency prices have inflated so tremendously over the past year. That means they could also go down with no good reason.”
In a note to clients today, UBS analysis expressed skepticism that cryptocurrencies will ever achieve mainstream acceptance. A “twentyfold increase in Bitcoin prices in just two years, and an absence of any fundamental economic backing, cryptocurrency prices are almost certainly a bubble,” they wrote.
To be sure, Bitcoin has fans in the investing world.
Fidelity CEO Abigail Johnson recently told a conference that she “loved” the cryptocurrency. Money manager Michael Novogratz, who is raising money for a $500 million crypto fund, recently predicted that Bitcoin prices would top $10,000 in as little as six months.
“This boom has been compared to the dot-com bubble,” said Simon Yu, CEO of Storm X, which has developed an app that rewards cryptocurrency users. “However, the dot-com bubble peak was a multi-trillion dollar market cap. Factoring in almost 20 years of inflation, as well as a globally active 24/7 community versus a stock market with limited hours, the $170 billion current market cap of cryptocurrencies [has] a long way to go.”
CoinMarketCap, which tracks cryptocurrency prices, lists more than 1,000 different types of digital money, most of which are worth fractions of a penny and lack the market demand to last. Bitcoin, which was invented in 2008 by a person or persons using the pseudonym Satoshi Nakamoto, is one of a handful of exceptions — at least for now.
“The naysayers arguing that Bitcoin is worth nothing because it has no government backing are wrong, but not because of recent price moves,” Werbach said. “They were wrong when Bitcoin was at $100. The basic foundations of cryptocurrencies are sound. Frankly, one of the biggest threats to Bitcoin and other cryptocurrencies is how they’re now so commonly understood as a way to get rich quick. That’s attracting all kinds of activity that will ultimately be problematic.”