Cryptocurrency bubble risks exposed by Bitcoin's recent slide

Bitcoin investors who bought at the start of the year would be up around 70 per cent in US dollars, but those who bought near the peak later this year are down around 25 per cent.
They seem to be almost everywhere. Cool looking hipsters livin' the dream after amassing a fortune in the world of crypto.

Social media sites are overflowing with them. Even old school glossy magazines, barely clinging to life, have dialled in with tales tall and not so true of the fabulous riches to be earned in the ether.

There's no doubt they exist. Those that either got in early or built financial structures that facilitate trades which, none like to admit, replicate old style banks and broking houses, have socked away unimaginable riches.

But what of the hoi polloi? How many newly arrived crypto traders, just for example, lost their life savings last weekend, when bitcoin and the crypto universe plummeted?

Just like pokie addicts and those who frequent the track, the wins are talked up while the losses often are forgotten.

The allure may be the same; the chance to strike it rich, big time. But, unlike ordinary gamblers, many crypto devotees have embraced what they believe is the future of finance with a kind of religious zealotry that insulates them from reality.

Launched in 2009, Bitcoin was supposed to liberate ordinary citizens from the shackles of government and nation; an alternative, independent and truly global financial system.
More than a decade later, however, and the faithful can't, or refuse to, recognise the ultimate irony. Instead of overthrowing traditional currencies, bitcoin and its 10,000 or so imitators are still priced in them.

The devotees, even the famous and fabulously rich, measure their wealth not in BTC but in greenbacks, yen, pounds, euro and Aussie dollars.

Money, money, honey
We all want it. We all need it. But precious few know how it truly works.

Money, even good old fashioned notes and coins, is a complex and little understood phenomenon that relies on faith; that it is backed by real wealth and that it will be redeemed. Even then, there are competing theories as to how it operates, how it is created and how it is controlled and manipulated.

At its most basic, it is a medium of exchange. And it usually is backed, either by the implicit promise of a government or some other store of wealth, like gold.

Bitcoin was supposed to provide an alternative; an island of stability in a sea of nation-based fiat currencies that have become debased and diluted by governments, a system wracked by regular financial crises.
Instead, bitcoin has become almost useless as a medium of exchange, given it is expensive and slow in transactions.

But it is the extreme volatility that has rendered it truly unusable. A car dealer who accepted Bitcoin at $US68,000 a fortnight ago would have ended up nursing a mammoth loss last week.

And if there is one thing the pandemic has proved, it has evolved into a purely speculative, high-risk plaything.

Rather than a safe haven, which should appreciate during times of crisis, cryptocurrencies accentuate the economic wave.

Bitcoin bubble

They soar in good times and collapse at the slightest hint of trouble. In the past year, that volatility has hit the steroids, transforming cryptocurrencies into an unstable and potentially lethal investment.

As the price graph above shows, global stock and property markets — both of which have inflated enormously as interest rates have been cut to zero — have been relatively tame in comparison.

That's attracted the suited and booted. Wall Street thrives on volatility and, in the past year, investment banks and global funds managers have begun dabbling in the crypto world. Even retail banks like the Commonwealth Bank have opened the door for customers to take a punt.

But when banks of computers and algorithms enter the trading equation, the chance small-time players can trade their way to glory rapidly diminishes.