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15 Dec 2017 13:49
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  •   Home > News > International

    Bitcoin: Here's what would happen if the 'bubble' burst (and why it probably won't impact you)

    Bitcoin has — briefly — passed the $US11,000 mark, but analysts are sceptical of the digital currency's meteoric rise. Here's why some are predicting a crash, and what that would mean.


    Bitcoin has crossed over the $US11,000 mark — briefly — as it continues its whirlwind end to the year.

    It's more than welcome news to investors, who are embracing the increasing value of the digital currency, but market analysts are a bit more sceptical.

    Here's why some are predicting a bitcoin crash and what would happen if it does.

    ICYMI, Bitcoin is going crazy right now

    Bitcoin is a type of digital cryptocurrency that first emerged in 2009.

    The reason why everyone keeps talking about it is because it's increased tenfold in its value since the beginning of the year, and is currently worth more than $US10,000 after its value more than doubled since the beginning of October.

    "The bitcoin phenomenon is almost unprecedented," John Noonan, senior forex analyst at Thomson Noonan, said.

    "I've never seen anything like it, certainly in my 44 years.

    In fact, the cryptocurrency's current market capitalisation — its price multiplied by the number of coins that have been released into the system — is roughly $US214 billion, according to industry website Coinmarketcap.

    To put that in perspective, that is equivalent to the combined market cap of the Commonwealth Bank (at $140 billion) and National Australia Bank (at $80 billion).

    Mr Noonan told ABC News Breakfast there are a few reasons that make bitcoin an attractive bet to some investors, including the fact it does not have a central bank and that there is a limited supply of bitcoins.

    One of the other factors credited with driving the prices higher has been the announcement that investors will soon be able to bet on bitcoin futures. Even the Nasdaq is reportedly looking at getting in on that.

    There's also a great deal of hype going on, fuelled somewhat by the intense media coverage it's been getting lately.

    That means some are predicting a crash

    Some experts and economists see the massive growth in bitcoin value over a short period of time as an indication that people are buying because of the hype. They appear to see it as a risky investment at best, extremely volatile at worst.

    It took 834 days for Bitcoin to top $US1,000, and another 1,270 days to hit $US2,000 on May 20, 2017. But in the later half of this year alone, it has already surpassed $10,000.

    It's why analysts are comparing it to Tulip Mania and the dot-com crash. Bloomberg's Stephen Gandel has even estimated that based on valuation, bitcoins are four times more expensive than dot-com stocks were at the height of their bubble.

    Over the past two years, the digital currency has experienced numerous crashes, usually every couple of months.

    So what would a bitcoin wipeout look like?

    If there was a catastrophic fall in prices, there would be winners and losers.

    But it is unlikely to pose a risk to the global economy like other bubbles, according to bitcoin expert Adrian Lee, a senior lecturer in finance at the University of Technology in Sydney.

    That's because, for one thing, there's not as much money tied up in bitcoin as there was during the dot-com bubble, Mr Lee says, pointing out that while there is billions in bitcoin, there were trillions spent during the dot-com bubble.

    "So [for example], it wouldn't effect the Australia dollar I'd say, because nobody really uses it at the moment," he said.

    "If you think about it, there's trillions of trading in the Australian dollar whereas bitcoin is at most worth [approximately] $200 billion at total so it's hardly anything compared to the trillions in foreign exchange.

    What also makes this unique is that it is unlikely people are borrowing to invest in bitcoin, according to RMIT professor of economics Jason Potts.

    "There's very little evidence of anyone borrowing money to buy cryptocurrency and if I was a bank or a lender, there's no way I would loan out money to do that," he said.

    Could a bitcoin crash spark a bigger crash?

    Our experts said that seemed unlikely. It's still a relatively small number of people with money invested — roughly similar to the amount of people using email in 1994, Mr Potts said. So we're still very much in the early adoption phase.

    And Mr Potts said there had not been many retail investors involved. "The sort of people who would hold superannuation funds … they're not in this market and might not be for some time," he said.

    That would limit the fallout to the wider economy in a worst-case scenario. "If it crashed, it would only largely be those people who speculate on it, maybe people who use bitcoin and maybe the exchanges may lose money. But then again the exchanges don't require much overhead to run it, so if it fell they'd still be OK," Mr Lee said.

    Mr Potts agreed. "It doesn't actually cause catastrophic financial meltdown. Some people who bought at the wrong time would be angry, other people who have been waiting to buy would be happy," he said.

    Those who have invested in associated entities, including mining infrastructure and ICO-based businesses, would also lose out, Mr Lee said.

    "The bitcoin miners would take a big hit, these guys who all they do is buy machines to mine bitcoins will lose money when the value falls," Mr Lee said.

    He also said the impact on other cryptocurrencies would depend on what sparked the crash.

    If it were as a result of central banks cracking down on bitcoin then you would expect the value of other cryptocurrencies to also fall. But if it was because of irrational exuberance, then only those cryptocurrencies that have experienced similarly sharp rises in their value would drop.

    And it might not even be a bubble

    Mr Potts says the chances of systematic crash are extremely low.

    The bitcoin expert told the ABC that the recent surge in value is not a 'bubble' but a "price discovery".

    "Bubbles are things that happen to technologies or commodities or products that we know what they're for, so tulips can have a bubble because you know what they're for, or houses can have a bubble if the price of a house departs wildly from people's ability to pay … but this isn't like that," he said.

    "This is a fundamental, radical new technology where every day we're discovering new uses for it and that gets priced in.

    "I think what we're observing in this growth of price over the last nine years … is this gradual discovery of more and more uses for it, this gradual confidence in the technology."

    Besides, Mr Potts says there's been what could be described as "crashes" in bitcoin every few months. On Wednesday alone, bitcoin rose as much as 15 per cent, but by mid-afternoon (US time) was trading at $US9,500 at one point because of a crash that lasted roughly six hours.

    "There's been some big crashes, crashes of up to 80 per cent [of its value] and it's recovered," he said. "What's impressive is that they happen and then it bounces back."

    "There's an enormous amount of volatility, but there's also a long-term growth trend in bitcoin in particular. It has grown [apart from 2014] every other year so over in the long-term it's been a solidly performing asset," he said.

    "It's just scary to hold."

    © 2017 ABC Australian Broadcasting Corporation. All rights reserved


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