Commentary. Bitcoin began as the first truly democratic currency. But it’s become a target of financial speculation and a potential economic liability. With talk of a bubble, the biggest unanswered question remains: What is cryptocurrency actually worth?

The Bitcoin boom was helped by central banks’ low interest rates

Let’s talk about cryptocurrencies, and in particular the most famous: Bitcoin. For most people, it is something mysterious; for some, it is no less than the fulfillment of one of the most cherished dreams ever since the beginning of society and the economy as we know it: to coin money on their own, bypassing the monopoly of the state, and dispensing with banks and other intermediaries for their transactions. A real “democratic” currency, exchanged through a peer-to-peer network made up of many connected computers (called nodes) — a currency conceived, in theory, to be circulated, not hoarded.

Easier said than understood. Indeed, the production of cryptocurrency, which evokes metaphorically the extraction of minerals (“mining”), is certainly not an activity within the grasp of ordinary people.

To summarize (very) briefly: On a regular cycle, an algorithm produces a series of encrypted records, which are transformed into money only after they have been decrypted. Needless to say, such an operation requires great computing power, and thus large-scale hardware that is able to accomplish it. It is easier to just buy Bitcoin, exchanging it with money in one’s own currency. There are special platforms for this; you only need to open a virtual “wallet” in which you can store the cryptocurrency. From the wallet, of course, you can also initiate payments. You can use Bitcoin to shop online, as well as at physical stores that accept it as a form of payment. But you can also use it — this is the main focus nowadays — for financial speculation.

But why, after some initial interest (Bitcoin was born in 2009), does it seem that the history of these virtual currencies has already reached its peak? Essentially, it was due to the failure to expand their main function (as a means of payment) on the market, the increasing control over them by small groups, various technical difficulties related to the management of the ever-increasing information flows, and their use for illicit purposes (money laundering, tax evasion, the international arms trade, etc.).

Then came the turning point. Since the beginning of this year, Bitcoin has seen its value go from $900 to $18,000, although there are large swings in the price from day to day, or even within only a few seconds. Its main competition, Ethereum, is also worth mentioning — the cryptocurrency created in 2014 by the Russian Vitalik Buterin, was trading on Jan. 1 at just over $8. Today it’s worth more than $600. And what about the newest arrival, “Bitcoin Cash”? Born from a split among the Bitcoin developers on July 31, today its price already exceeds $1,400.

What is fueling this renewed attention to cryptocurrencies? Some of the factors at play are contingent, and some are valid for the longer term. Some aspects to be considered are the changes in the political situation, from Brexit to the American elections. In recent months, many international investors have chosen a cryptocurrency to store their assets while waiting for the situation to stabilize. And today, another very important factor is the search for more profitable investments, given the low interest rates offered by the central banks.

Large-scale buyers can be found among the Chinese, who, despite official condemnation of the idea by the political authorities and the central bank of China, have been flirting for some time with the idea of ​​a global currency that would not be subject to American influence. This idea has probably crossed Putin’s mind as well, who just recently met with his talented fellow countryman, the inventor of Ethereum, to evaluate together the ways in which the cryptocurrency might be beneficial for the Russian economy. Venezuela has taken an even more active role. A few days ago, in order to counter the inflation of its currency, the bolivar, it announced plans to launch its own virtual currency, the first one controlled by a government and guaranteed by the country’s mineral resources: the Petro.

The fact is that today, one Bitcoin is worth 10 ounces of gold. And there is already talk of “the new gold,” with wild-eyed forecasts for the future: one Bitcoin worth $55,000 by 2022. Dizzying figures, rising expectations — the signs of a growing bubble. Is there danger for the economy? For now, looking at the quantity of the currency in circulation (worth no more than $305 billion), one wouldn’t think so. But everything could change as a result of market expansion and the decisions of the governments and the banks, which could finally remove the limitations on the potential of this form of currency.

One unresolved question remains: How much cryptocurrency represents the underlying asset of the derivatives that are being exchanged on the market nowadays? It isn’t a theoretical issue, as the potential for contagion of a possible bursting of the bubble depends, in part, on this.

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