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Bitcoin: Bubble or breakthrough?

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The frenzy over Bitcoin brought the world’s total value of the digital currency to $877 billion last week, and major financial institutions have taken notice, said Robin Wigglesworth and Eva Szalay at the Financial Times. The decentralized currency, ‘mined’ through “an energy-intensive network of computers,” has gained wildly diverse adherents, from hedge funds to banks to the actress Lindsay Lohan. Tesla spent $1.5 billion of its cash reserves on Bitcoin and said it would soon start accepting it as payment for its vehicles. That inspired a flurry of digital currency–related announcements from other companies, including MasterCard. This week, the price of a single Bitcoin (which can be divided into fractional payments) soared to $50,000. Believers say that Bitcoin offers “protection against currency debasement or authoritarianism” and could replace the role gold played in previous eras. But we’ve seen this pattern before. Bitcoin enjoyed “a similarly wild upswing in 2017, only to subsequently plummet 80 percent from its peak.” Many of the current bulls may be following the credo of George Soros, who once said, “When I see a bubble forming, I rush in to buy.”

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The ideology of competing currencies actually has a “rich historical tradition that includes such luminaries as F.A. Hayek, Milton Friedman and Ludwig von Mises,” said Max Raskin at The Wall Street Journal. The long-term value of Bitcoin will be determined not by speculators but by true believers who keep an eye “on new applications and technological developments as well as daily price swings.” Digital currency enables powerful real applications, “such as smart contracts, which automate and authenticate complex payment arrangements.” The people who’ve stuck with Bitcoin are those “genuinely dedicated to the ideal of private money and competing currencies.” Some of those early advocates are now billionaires, because “Bitcoin may be the best-performing investment of all time,” said Nir Kaissar at Bloomberg. A $100 bet on Bitcoin on day one, or even close to it, would be worth nearly $80 million. The trouble is that Bitcoin’s wild swings “don’t make it easy to hold on,” so “investors who were in and out had as much opportunity to lose a fortune as make one.”

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There’s a reason people talk about investing in Bitcoin, not spending it, said Nouriel Roubini at the Financial Times: “The Flintstones had a more sophisticated monetary system.” Their shells were a more practical store of value. For Bitcoin, “currency” is a misnomer; even a conference about Bitcoin refused to take it as payment. Its future is “only as a speculative asset bubble.” At least the Dutch tulips of the 1600s had some utility, as flowers. Bitcoin’s ascent is fueling a surge in even stranger digital assets, said Robert Hackett at Fortune. Take Dogecoin. Doge was intended as a joke, and most investors don’t realize that “10,000 new ‘Dogecoins’ are programmed to be issued every minute for the rest of eternity, all but ensuring the debasement of their value over time.” But the ubiquitous Elon Musk has been “singing its praises” on Twitter, and the rapper Snoop Dogg “recently rebranded himself, in jest, as ‘Snoop Doge.'” The result: It went up in value by 1,600 percent, with only a few “spoilsports” griping that it might pop and give all digital currencies a bad name.

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This article was first published in the latest issue of The Week magazine. If you want to read more like it, you can try six risk-free issues of the magazine here.