Anyone who still thinks bitcoin is a viable form of money should have learnt otherwise last week. The cryptocurrency’s wild fluctuations say it isn’t. For those just looking to get rich quick, the message is even simpler: buyer beware.

At one point on Wednesday the price of a bitcoin had dropped more than 40% over a week — disconcerting for the throngs of retail investors who, egged on by Elon Musk and other celebrities, had helped drive it up more than 230% over the previous six months. In a matter of days, hundreds of billions in virtual wealth disappeared.

That’s right: bitcoin is volatile. In other words, it isn’t on track to displace traditional government-issued currencies. If a bitcoin buys one Tesla today and only half a Tesla tomorrow, it’s useless as a means of payment and store of value (unless you’re a criminal with limited options). And this is before you consider the inefficiencies and environmental impact of a system that requires power-hungry computers around the world to vouch for each transaction.

Crypto’s lack of actual utility won’t stop many from profiting handsomely. Its novelty and detachment from any sense of fundamental value make it appealing to the intermediaries it was designed to disrupt. Traders and hedge-fund managers thrive on the volatility; banks can offer custody services; creators of exchange traded funds are eager to offer bitcoin versions. Investors briefly valued crypto exchange Coinbase at more than $100bn — thanks to the fees it charges customers wanting a piece of the action.

Cryptocurrencies’ gyrations will most likely create and destroy many more fortunes yet. Authorities should pursue the criminals, caution the unsophisticated, and ensure that speculative fervour doesn’t threaten the broader financial system. Beyond that, look out. Your crypto is worth only what the next buyer will pay — and that could be an awful lot less than you hope. /New York, May 21

Bloomberg Opinion


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