Will Bitcoin investors turn winners like those who survived the internet boom in the 2000s?

Dubai: Billionaire investors and analysts are comparing the likeness of the current crypto craze sweeping across the investment community to the internet boom that happened two decades ago.

The market value of all cryptocurrencies recently topped $1 trillion (Dh3.67 trillion) for the first time and many new believers are now of the opinion that cryptocurrencies like Bitcoin, Ethereum, and a few others will be analogous to those assets that were built during the era of the internet boom.

Not Bitcoin’s first rodeo

Bitcoin has surged by as much as 284 per cent from the beginning of October through its record high of $40,797 (Dh149,846) on January 7. Rivals Ethereum and Litecoin gained 263 per cent and 282 per cent, respectively, over the same period. Cryptocurrencies have already survived one boom-and-bust cycle.

In late 2017, Bitcoin's price climbed from about $4,000 (Dh14,691) a coin to nearly $20,000 (Dh73,459) before eventually bottoming out in December 2018 near $3,200 (Dh11,753).

Reason for price rise confirmed

One prominent reason for the current boom continues to be because big investors are eyeing the once volatile cryptocurrency as a hedge against inflation, with growing numbers of major institutional investors, hedge funds and pensions money managers buying in.

Analysts also cite that the public frenzy around the latest boom in the digital currency has drawn in speculative buyers and has been driving up the price of the 12-year-old cryptocurrency.

Bitcoin has doubled in less than a month and it’s price has jumped by more than 700 per cent since the pandemic was first declared in March last year, rising from about $5,000 (Dh183,64).

Boom or bust – currencies are evolving

“Cryptocurrencies are all the rage at the moment and are as much about blockchain as anything else but there could be an increasing desire for alternative medians of exchange in the years to come if we are correct,” noted Jim Reid, economist at Deutsche Bank.

There are more than 18 million bitcoins now in existence, generated by “miners” who also provide the computational power underpinning the blockchain, a digital ledger maintained by thousands of computers worldwide that records transactions made using the currency.

The mathematical system that generates new bitcoins – which is decentralised and therefore has no controlling institution such as a central bank – has a hardwired maximum of 21 million coins.

Prospects to replace gold?

In the past, investors have bought assets such as gold, which are perceived as ways to insure against inflation because they tend to hold their value during times of economic stress. This time around, some analysts argue Bitcoin could rival precious metals as an alternative.

Analysts at JPMorgan have said Bitcoins could be worth as much as $146,000 (Dh536,253) each if they were to become as established as gold.

Comparing the digital currency to the precious metal, the lending giant said Bitcoin would need to rise by more than four times to match the $2.7 trillion (Dh9.9 trillion) value of gold owned by private investors.

Has Bitcoin peaked or will it go higher?

However, multiple analysts are of the opinion that Bitcoin had probably now hit its peak for the year, and could suffer a sharp drop if it ballooned any further.

If anything, the speculative money that is currently happening is pushing up the volatility of Bitcoin. In a way, that is actually delaying its convergence with gold, which is key for its sustainability.

“I wouldn’t be surprised if there is not some correction. How big that correction is depends on how far it goes,” wrote JPMorgan analyst Nikolaos Panigirtzoglou. “If it goes to $100,000 (Dh367,297), I think the correction is going to be big.”