Persistent low interest rates are the supposed rational explanation for continued interest in bitcoin. But there is little rational about cryptocurrencies.
The digital currency has surged 156 per cent so far this year. It traded as high as US$18,835 ($27,175) last week, according to Coindesk. That leaves it about 4 per cent below its all-time high of US$19,666 set in December 2017.
The return of bitcoin mania, following a spectacular crash in 2018, has prompted some big-name cheerleaders to put their hands in, fuelling a further price rise.
Square, the US payments company, bought US$50m worth of the bitcoin last month. The company, which launched bitcoin trading in 2018 with Cash App, said the investment would allow it to "learn and participate [in bitcoin trading] in a disciplined way".
Rival PayPal followed up with its own bitcoin investment weeks later. Starting this month, US users can buy, hold and sell bitcoins in their digital wallets. In 2021, it plans to expand the service to Venmo and allow the 26m merchants that use PayPal to accept bitcoin for payment.
You cannot blame the two companies for jumping on the crypto bandwagon. The market capitalisation for the top 100 cryptocurrencies now stands at US$551bn, with bitcoin accounting for 62 per cent of that, according to data from website CoinMarketCap. For all the volatility and lack of fundamental underpinnings, cryptocurrencies have become a sizeable industry.
Fans like to point to bitcoin's 21m supply limit as a hedge against inflation similar to gold. Critics deride the digital currency as little more than a glorified Ponzi scheme.
But there is a difference between servicing and investing in bitcoin. For payment companies like PayPal and Square, whether prices for bitcoin will continue to go up is irrelevant. There is also value in understanding how bitcoin's underlying technology works and whether it can be used to streamline payment transactions. With market caps of US$231bn and US$93bn respectively, PayPal and Square can afford to make minor forays into bitcoin — modern epitome of a speculative asset bubble or not.
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- Financial Times