If your share portfolio was heavy with tech stocks last year, you likely closed out the year with some healthy gains. The Nasdaq stock exchange, home to the likes of Amazon, Apple, Google, Microsoft, and Tesla, closed the year with the value of its listed companies increasing 43%, thanks in large part to the hype surrounding artificial intelligence.
But that increase pales in comparison with the rise in value of cryptocurrencies, which collectively jumped over 100% in 2023 as the crypto winter came to an end. Bitcoin, the most popular and valuable digital currency, climbed 160% to around US$45,000 for a single coin.
We have, of course, seen this sort of bull run often enough to know that it doesn’t signal the looming mass adoption of digital, decentralised money. As much as I love the idea of using bitcoin to pay for my groceries, bypassing the fee-hungry banks and credit card companies in the process, cryptocurrencies are still predominantly a speculative investment.
Technically, many offer methods of transferring value that are superior to the traditional financial systems that currently underpin the global economy. But history is full of examples of leading technologies that failed to win the race against inferior rivals.
The philosophical and technical genius of the crypto space, and the blockchain technology that underpins it, have been overshadowed by rampant speculation, hype, market manipulation and outright fraud. Remember the NFT (non-fungible token) craze of 2021, in which the pixelated digital artworks of the Bored Ape Yacht Club attracted multimillion-dollar prices? Those artworks are largely worthless now, their owners no doubt mystified as to why they bought them.
As Zeke Faux, the Bloomberg reporter and author of Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall, put it: “From the beginning, I thought that crypto was pretty dumb. And it turned out to be even dumber than I imagined.” The trial last year of Sam Bankman-Fried, the former crypto billionaire and founder of the collapsed FTX exchange, was a grim accounting of the regulatory and moral failings that have plagued the industry.
So why are investors once again driving the price of cryptocurrencies higher? Strong rumours have been circulating for months that the US government is on the verge of approving spot Bitcoin exchange-traded funds (ETFs), which would make it much easier for investors to own bitcoin without having to buy it via cryptocurrency exchanges and assume responsibility for safely storing it.
We will also see the so-called “Bitcoin halving” in April, an event that happens every four years and reduces the reward for mining new blocks on the Bitcoin blockchain, reducing the rate at which new Bitcoin is generated. That makes Bitcoin more exclusive and valuable to hold.
The investor’s adage “buy the rumour, sell the news” is particularly relevant to the crypto sector. Sentiment is once again high on the back of speculation that Bitcoin will soon be more accessible and attractive to investors. But the news itself, when it arrives, may be disappointing.
Regulators around the world remain deeply wary of the risks posed to investors by trading and owning cryptocurrencies. Crypto-specific regulations have been drawn up in many countries and could lead to stringent provisions being introduced this year.
True Bitcoin believers see it as a liberating technology that frees people from the grasp of the existing financial gatekeepers. But the only pathway to widespread acceptance of cryptocurrencies in general will likely involve the new financial players having to look and act a lot like the old ones.
