Your feedback is essential to help us improve - click here to take our 3 minute survey.

Bitcoin up 384% in the last year as experts warn of possible ‘meltdown’

Bitcoin up 384% in the last year as experts warn of possible ‘meltdown’
Source: Getty Images

Bitcoin is up 384% since this time last year. That means if you invested £1,000 in Bitcoin this time last year, then it would now be worth £3,840. Not a bad return on your investment! If you invested that £1,000 five years ago, the returns would be crazy! The money invested in 2016 would now be worth over £77,000.

Here, I take a look at why Bitcoin is worth so much and why experts are warning that price volatility might trigger a global financial meltdown.

What is Bitcoin?

Bitcoin is a virtual cryptocurrency that doesn’t have any physical banknotes or coins. It can’t be used in any online or high street shops to pay for things yet. This means it’s mainly popular with investors rather than shoppers.

At the moment, the currency has no real value as it can’t be spent in many places. Its value is simply determined by what investors are prepared to pay for it.

Investors hope that Bitcoin will eventually be as widely accepted as pounds sterling or US dollars. In the meantime, investors are buying up Bitcoin in the hope that the price will continue to increase.

Why is Bitcoin worth so much?

Bitcoin has grown hugely in value because there is high demand for it among investors. Like any investment, if demand outstrips supply, this usually leads to price growth.

The value of Bitcoin is also increasing because there is a cap on the number of Bitcoins that can be ‘mined’ or owned. That cap is set at 21 million, and the fact that there is a limited supply is pushing up the value.

In contrast, many global currencies do not have a limited supply. Global governments often print more money to raise revenue and increase the money supply. This is called quantitative or monetary easing and it means that currencies are worth less than they would be if the supply was limited.

But there is no monetary easing with Bitcoin. The limited supply means that if demand is strong, then the price is likely to rise over time.

Why are experts warning of a meltdown?

Some experts believe that cryptocurrencies like Bitcoin could trigger a global crash.

Last week, Jon Cunliffe (the Bank of England deputy governor for financial stability) used a speech to give some stark warnings about cryptocurrencies, including Bitcoin.

He warned about big swings in the value of cryptocurrencies. He said, “Cryptoassets are growing fast and there is rapid development of new applications for the technology. The bulk of these assets have no intrinsic value and are vulnerable to major price corrections.”

This means that large swings in the value of cryptocurrency are likely to continue for some time. Those big swings in value could lead to a domino effect and trigger a global financial meltdown.

According to Cunliffe, this is because “a large fall in crypto valuations could affect investor risk sentiment more broadly, causing investors to sell other assets that are judged to be risky and those perceived to have a similar investor base.”

In other words, if cryptocurrency falls in value and investors are spooked, then they might rush to sell their other investments. This could cause a widespread loss of investor confidence and a stock market crash.

Is more regulation of Bitcoin needed?

Jon Cunliffe went on to call for tough government regulation of cryptocurrencies, including Bitcoin.

He warned that “When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice. They have to think very carefully about what could happen and whether they, or other regulatory authorities, need to act.”

Cunliffe believes that governments and central banks need to act fast to regulate cryptocurrencies to avoid a financial meltdown. He explains, “Regulators internationally and in many jurisdictions have begun the work. It needs to be pursued as a matter of urgency.”

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Rated 5 stars out of 5 by The Motley Fool UK

Trade UK shares for just £2.95 and US shares for just $3.95 — with no platform fee!

The FinecoBank* Multi-Currency Trading Account offers UK investors highly competitive share-dealing rates across 26 global markets. Open your account using promo code TRD500-ML and during your first 3 months you can trade without incurring commission charges – up to a total commission amount of £500. (Terms and conditions apply.)

*Affiliate Partner. Important information and risk disclaimer: The value of shares and any income produced can fall as well as rise, and you may get back less than you invest. Exchange rate fluctuations can reduce the sterling value of any overseas holdings.

Was this article helpful?

Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.