$16k Bitcoin: Cambridge experts discuss whether it’s a bubble set to burst

PUBLISHED: 13:54 21 December 2017 | UPDATED: 13:54 21 December 2017

The value of a bitcoin has shot above $16,000

The value of a bitcoin has shot above $16,000

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Bitcoin ‘runs the risk of flying apart’, says Anglia Ruskin University study. But others forsee a new golden era....

Emily Mackay, CEO of TAB (formerly Crowdsurfer). 'The very mention of the word Emily Mackay, CEO of TAB (formerly Crowdsurfer). 'The very mention of the word "bubble" could have a self-fulfilling effect of moderating demand.' . Picture: Richard Marsham

The value of one Bitcoin crossed the $16,000 threshold this month, unleashing a highly charged discussion in Cambridge as to whether this price consitutes a bubble for the cryptocurrency.

A divergence of views emerged with the publication of a study by Anglia Ruskin University (ARU) which “shows that it (Bitcoin) has technically been in a bubble since the price rose above £1,000”.

Even a year ago such a bubble would have attracted little attention – in fact there have been five or six bubbles since the first Bitcoin was mined in 2009. But the astonishing hike in its exchange rate – in April one unit was worth less than $1,000, and on December 21 the price stood at $16,752 – is now sucking in a lot of value.

The study’s co-author Dr Larisa Yarovaya, lecturer in accounting and finance at ARU, said: “Our evidence finds that the price of Bitcoin has been artificially inflated by speculative investment, putting it in a bubble.

Richard Baker, CEO of GeoSpock. 'I think prices have some way to go.' Picture: Keith HeppellRichard Baker, CEO of GeoSpock. 'I think prices have some way to go.' Picture: Keith Heppell

“As the price of Bitcoin explodes, it runs the risk of flying apart. Although Bitcoin is not regulated by governments, it could still have a knock-on effect on traditional markets due to the interconnectedness of cryptocurrency markets with other financial assets.”

But Michel Rauchs, lead in cryptocurrency and blockchain at the Cambridge Centre for Alternative Finance, based at the Camnbridge Judge Business School, sees things slightly differently. “It depends on how you see Bitcoin,” he said. “The (ARU) paper sees it primarily as a currency, so bases its efficiency on its performance as a currency. But Bitcoin means different things to different people – it’s actually not very convenient or efficient as a currency. But if you think it’s only used as a currency then yes it is in a bubble – nothing can justify those prices.

“Perhaps the biggest confusion is the word ‘cryptocurrency’. A better word is ‘cryptoassets’, because it is more used as a digital asset – it can be used as a currency but it doesn’t need to be.”

“I believe even as an investment it’s in a bubble,” countered Dr Yarovaya. “As an investment the true value of Bitcoin is potentially zero. It’s not gold, it has no true value. The price is higher than the true fundamental value so sooner or later the investors’ preferences regardng Bitcoin and cryptocurrency will change and the bubble will burst.

A cafe accepting Bitcoin as paymentA cafe accepting Bitcoin as payment

“It could be within one week, or in three months’ time.”

Emily Mackay, of alternative finance specialists TAB, said: “The Bitcoin price chart certainly looks like it’s a bubble. At the same time the price is a simple function of supply and demand, so price does not inevitably have to crash, but could change more subtly if, for example, mining rates increase.

“The very mention of the word ‘bubble’ could have a self-fulfilling effect of moderating demand too. We live in an age where anything can happen, so I’m not going to try to predict this one!”

But Richard Baker, CEO of data science analytics firm GeoSpock, says the $15k valuation could prove to be low in 2018.

“Speculation is driving current price behaviour and pricing is predicted to be anything from $40,000 to $500,000 in the next 12 to 18 months,” he said.

“No one knows. This month two major futures exchanges have launched Bitcoin futures, the CME and CBOE, this will allow professional institutional money to start trading Bitcoin in 2018. I think prices have some way to go yet.”

Differences also emerged on the amount of energy required to mine Bitcoin – the process of using software to add transaction records to Bitcoin’s public ledger of past transactions, or blockchain.

Recent reports say that at the current rate of growth Bitcoin mining will consume all the world’s electricity by February 2020 – it is already using more electricity than 159 countries, having risen 30 per cent in the last month alone.

“This is not guaranteed to happen,” says Mr Rauchs. “Theoretically it would then use more energy than there is in the universe. I’m sceptical of that point of view.”

“I think yes we should be worried,” says Dr Yarovaya. “Of course it will have a negative impact on the environment, it’s not an energy-efficient process.

“The spectrum of Bitcoin’s popularity has to be a concern for a society.”

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