The digitisation of markets is also – in part – behind the spectacular rise of Bitcoin. We wrote about Bitcoin in 2018 – even then it was becoming easier to buy and spend. More recently, PayPal has started to accept transactions in Bitcoin and more and more retailers are accepting it.
But that gradual expansion of Bitcoin’s presence as a medium of exchange doesn’t explain its rise in value. At the time of our last article, Bitcoin had been on a high of around £15,000. At the start of 2020, Bitcoin peaked at around £30,000, a rise of around 100%.
Should you have invested then? Maybe, but you would have to be prepared for eye-watering levels of volatility. Mohammad warns, “Within 12 months of the £15,000 high, the value of Bitcoin fell to around £3,000, a loss of 80%.”
All assets experience ups and downs, albeit not that extreme, but how can you tell which direction Bitcoin will go from £30,000?
The problem is you can’t.
“Bitcoin is an entirely speculative asset,” says Mohammad. “It has no intrinsic value in itself, and no real connection to the general economy. Other ‘stores of value’, like gold, have a well understood relationship to economic conditions and, particularly, inflation, based on a track record going back thousands of years. How Bitcoin is influenced by underlying economic conditions – if at all – is not well understood.”
A further factor behind both the GameStop phenomenon and the surge in value of Bitcoin is market liquidity.
“A decade of low rates has meant there is a great deal of money available for investors and, arguably, the availability of investments hasn’t kept pace,” says Mohammad. “This makes alternative assets like Bitcoin attractive, especially when bond returns are so low.”