Feature

Bitcoin FOMO is here

Fear of missing out drives a new mania 

The smartest insight and analysis, from all perspectives, rounded up from around the web:

A "roiling" debate about Bitcoin has split the world of finance into feuding camps, said Shawn Tully at Fortune. Its value has risen 89 percent in the past three months to soar above $66,000 per coin last week. Supporters insist Bitcoin is a hedge against "roaring" inflation and say this is "just the first leg in a moonshot." Skeptics, by contrast, see a Bitcoin bubble as the most extreme example of the euphoria driving up markets across the economy. "Many of the same prominent investors who saw the financial crisis of 2008 coming" view Bitcoin as little better than a Ponzi scheme, said Michelle Celarier at New York Magazine. Their warnings, though, are going unheeded by cryptocurrency speculators who think that "these are just old guys who can't help fighting the glorious last war."

The launch of the first two exchange-traded Bitcoin funds in the U.S. last week brought crypto further into the mainstream, said Michael Mackenzie at the Financial Times. They got SEC approval because they hold Bitcoin "futures contracts traded on the Chicago Mercantile Exchange, a fully regulated venue, rather than digital coins outright." That sounds like a safer investment. Unfortunately, it's not, because futures can badly "undershoot the returns" on the underlying assets. A case in point is the giant United States Oil Fund, said Michael Wursthorn at The Wall Street Journal. Over the past 10 years, "crude-oil prices have risen and fallen sharply but ended essentially where they started." Meanwhile, by betting on short-term price changes, the fund has lost 80 percent of its value.

The problems with Bitcoin go beyond the chances of individual investors losing their money, said Ben McKenzie and Jacob Silverman at Slate, because crypto investing is as risky as sitting down at the blackjack table. Most Bitcoin trading is done in Tethers, a so-called stablecoin whose value is supposed to remain constant. Investors can buy Tether coins for $1 each and use that currency on other digital exchanges, much like exchanging dollars for chips at a casino. Tether claims to have $69 billion in reserves, but investors have no way at all of confirming that. If Tether were to collapse or face a major regulatory crackdown, "market liquidity would likely dry up, and a lot of people could lose a lot of money" — including some people who didn't think their investments were linked to Bitcoin at all.

Bitcoin's return to an all-time high comes "after a rough 53 percent drop earlier this year, with volatility far exceeding that of gold or stocks," said Lionel Laurent at Bloomberg. And the truth is, no one really knows what's driving it. Amid all the hype around Bitcoin, any bad news, such as the doubts about Tether, simply "fails to register." One smart hedge fund manager exited his Bitcoin position, saying he just doesn't really understand this. "He's not alone." One thing is sure: Speculators, large and small, are "clambering onto the crypto ladder for a shot at keeping up with or beating their peers." As more people sign on to the "Bitcoin gospel," the FOMO ("fear of missing out") frenzy only grows — and the risks grow with it.

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.

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