For example, a collection of various bits of wood, fibre and oil will make up a painting by Picasso. Are those components worth €14 million? No but the rarity of the elements combined, coupled with the reputation of the painter push up the value way beyond the simple cash paid for the elements. Every time the painting is sold, it’ll likely increase in value, which is where the comparison of intrinsic worth falls down. The more people involved in mining Bitcoin and the more casual bystanders investing in the next big thing has pushed the value up, as interest grows. One single Bitcoin went from an already healthy value of around $1,000 to an unlikely $10,000 in the twelve months of 2017. These days it’s hovering around $7.000, representing a very healthy return, had you invested in late 2016.
As we can see, there is some volatility in the currency, as with any other. The big drop in value seems to have been due to the dreaded taxman. Cryptocurrencies were historically associated with the less salubrious corners of the internet, the so-called ‘dark web’ where anonymity was paramount when paying for drugs, guns or illicit ‘services’. Bitcoin and the like were the obvious choice, as they could be mined without revealing your identity and spent in a similar fashion. Now it’s gone mainstream, Bitcoin is traded on platforms that require registration and will take a payment via a bank or credit card. The taxman – often slow but never stupid – can now use these data to estimate your Bitcoin holding and tax it as they see fit. The more this has begun to happen, the less Bitcoin became worth. The basic driving principles of Bitcoin purchase can be summed up as a price drop due to FUD (fear, uncertainty and doubt) or a hike caused by FOMO (fear of missing out). So pretty much like anything else in life.
As with any original idea, there are now clones. Around 1,500 cryptocurrencies exist at time of writing. Some are based on ‘mining’, some are presented simply as a way for companies to raise capital, very much like buying shares. They may have an ICO (initial coin offering) allowing people to buy one unit of currency for a set price, the buyer gambling on the company taking off and pushing the price of their holding higher. It’s gradually getting better but as cryptocurrency is rarely regulated at the moment, the potential to fleece the unwary is tremendous.
If you’ve seen The Wolf of Wall Street, you’ll know what a ‘pump and dump’ is. If you don’t, it is basically a group of people advising victims to buy trash shares in moribund companies at a low, low price to people on what’s usually a cold call. The group will own thousands of such shares. Once the market responds by pushing up the share price due to a surge in interest, the group will dump all their shares, making a huge profit and crashing the price, leaving their marks empty handed. This practise is currently rife on the internet so if you’re thinking of dipping your toe in the water, be careful.