Bitcoin investors who bought at the start of the year would be up around 70 per cent in US dollars, but those who bought near the peak later this year are down around 25 per cent.(Unsplash: Executium)

They seem to be almost everywhere. Cool looking hipsters livin’ the dream after amassing a fortune in the world of crypto.

Social media sites are overflowing with them. Even old school glossy magazines, barely clinging to life, have dialled in with tales tall and not so true of the fabulous riches to be earned in the ether.

There’s no doubt they exist. Those that either got in early or built financial structures that facilitate trades which, none like to admit, replicate old style banks and broking houses, have socked away unimaginable riches.

But what of the hoi polloi? How many newly arrived crypto traders, just for example, lost their life savings last weekend, when bitcoin and the crypto universe plummeted?

Just like pokie addicts and those who frequent the track, the wins are talked up while the losses often are forgotten.

The allure may be the same; the chance to strike it rich, big time. But, unlike ordinary gamblers, many crypto devotees have embraced what they believe is the future of finance with a kind of religious zealotry that insulates them from reality.

Launched in 2009, Bitcoin was supposed to liberate ordinary citizens from the shackles of government and nation; an alternative, independent and truly global financial system.

More than a decade later, however, and the faithful can’t, or refuse to, recognise the ultimate irony. Instead of overthrowing traditional currencies, bitcoin and its 10,000 or so imitators are still priced in them.

The devotees, even the famous and fabulously rich, measure their wealth not in BTC but in greenbacks, yen, pounds, euro and Aussie dollars.

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Money, money, honey

We all want it. We all need it. But precious few know how it truly works.

Money, even good old fashioned notes and coins, is a complex and little understood phenomenon that relies on faith; that it is backed by real wealth and that it will be redeemed. Even then, there are competing theories as to how it operates, how it is created and how it is controlled and manipulated.

At its most basic, it is a medium of exchange. And it usually is backed, either by the implicit promise of a government or some other store of wealth, like gold.

Bitcoin was supposed to provide an alternative; an island of stability in a sea of nation-based fiat currencies that have become debased and diluted by governments, a system wracked by regular financial crises.

Instead, bitcoin has become almost useless as a medium of exchange, given it is expensive and slow in transactions.

But it is the extreme volatility that has rendered it truly unusable. A car dealer who accepted Bitcoin at $US68,000 a fortnight ago would have ended up nursing a mammoth loss last week.

And if there is one thing the pandemic has proved, it has evolved into a purely speculative, high-risk plaything.

Rather than a safe haven, which should appreciate during times of crisis, cryptocurrencies accentuate the economic wave.

Bitcoin bubble

The bitcoin price has been incredibly volatile compared to many other assets.(Supplied: CoinMarketCap)

They soar in good times and collapse at the slightest hint of trouble. In the past year, that volatility has hit the steroids, transforming cryptocurrencies into an unstable and potentially lethal investment.

As the price graph above shows, global stock and property markets — both of which have inflated enormously as interest rates have been cut to zero — have been relatively tame in comparison.

That’s attracted the suited and booted. Wall Street thrives on volatility and, in the past year, investment banks and global funds managers have begun dabbling in the crypto world. Even retail banks like the Commonwealth Bank have opened the door for customers to take a punt.

But when banks of computers and algorithms enter the trading equation, the chance small-time players can trade their way to glory rapidly diminishes.

How central banks are about to eat crypto’s lunch

Reserve Bank of Australia governor Phil Lowe is about as far removed from the world of grunge crypto as you could get.

RBA governor Philip Lowe says the bank may start issuing digital tokens similar to cryptocurrencies.(AAP)

For years a critic of crypto, the RBA, like many major central banks, has nevertheless been exploring ways of applying the blockchain technology behind cryptocurrencies for use in its own operations.

Millions of Australians now regularly use digital wallets on their smartphones and, in a speech last Wednesday, Dr Lowe outlined several possible scenarios in which the RBA may issue and back digital “tokens” similar to Bitcoin and other cryptocurrencies, in the same way it issues banknotes. But even that was a long shot, given our “efficient, fast and convenient electronic payments system”.

That wasn’t all. He then launched a bazooka at the cryptocurrency crew when he let slip that the bank was open to the idea of allowing private players to issue an electronic dollar linked to the Australian dollar for retail users.

But should that happen, it would need to be backed by high-quality assets like a bond.

“So, if privately issued stablecoins are ultimately the way things head, it will be crucial they meet very high standards,” he said.

Therein lies the biggest threat to the crypto crew. Having failed to take control of global finance, cryptocurrencies as they now stand may find themselves obsolete as the world’s biggest central banks turn the tables and launch their own digital currencies.

Digital currencies may be the “inevitable future of money” as one big crypto investor puts it, but it is highly likely they will be run by the very same central bank overlords that run global finance now.

Any privately run currencies or tokens will find themselves heavily regulated and forced to play within the rules.

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Dangers of the crypto bubble

For the second time in as many months, an Australian based crypto exchange, MyCryptoWallet, collapsed last week, leaving 20,000 investors stranded and most likely losing everything. BlockChainGlobal went under in October owing $23 million.

Almost totally unregulated, investors use these exchanges to trade cryptocurrencies and usually leave their investment with the exchange for safekeeping. The alternative is to keep it yourself on a hard drive or some other form of technology that either can fail, be lost or forgotten.

The overall value of cryptocurrencies now has surpassed $US3 trillion.

That doesn’t include the nefarious world of NFTs, non-fungible tokens, on anything from art to imaginary real estate and livestock. You can even put your imaginary paddocks up to agist imaginary horses for decent returns!

If the whole thing unravels, the losses will be anything but imaginary.

Little wonder central banks and governments are jittery and belatedly trying to rein the whole phenomenon in. More than 20 countries, including China, have banned bitcoin and many others, including Australia, are looking to impose regulations.

In the event of a serious collapse in the value of these markets, there could be severe real-world economic consequences. But, given they freewheel outside the system, there is no safety mechanism or potential for a bailout.

With the spectre of rising interest rates sending a cold shiver through high-risk asset markets, a shake-out in these overhyped, overvalued and overweight markets looks almost certain.

And the repercussions could be far more serious than anyone anticipates.

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