A joke appeared on Twitter on Thursday: Black Friday started the day before with bitcoins. Cryptocurrency is suddenly so cheap. Because the price collapsed overnight. While bitcoin cost more than $ 19,500 on Wednesday, which is more than three years away, on Thursday it was sometimes less than $ 16,500. This accident was preceded by a real rally. Just two days ago, the cryptocurrency reached $ 19,000 and was on the verge of reaching a new record.
With the reset, the pattern is now repeated. Because this is not the first time that the price of cryptocurrency will rise rapidly and then collapse. Investors and speculators buy bitcoins until the price is so high that most no longer believe in further price increases. Many then suddenly drop out, causing the course to collapse. This means: For cryptocurrencies, a financial bubble forms regularly, bursts, and then a new bubble is formed.
Above all, financial experts have a psychological explanation for this: Many investors are driven by the fear that they will miss something. They call it the Fomo effect, which is an abbreviation for the English term (“fear of loss”). “No asset class in the world is as exposed to Fomo as bitcoins,” says US investor Brian Kelly.
That’s why you can see these huge price fluctuations: The more the price of cryptocurrency rises, the more investors want to get involved, whether they’re familiar with the market and able to assess risks or not – until panic begins and many get back.
Will cryptocurrency trading be suitable for the masses?
The price for cryptocurrencies has recently been determined mainly by two development trends: On the one hand, professional investors are increasingly entering the market. Due to low interest rates, bitcoins are also bought by pension funds and family offices, which invest money from wealthy families. On the other hand, the news has strengthened that the US payment service provider PayPal now also offers cryptocurrency trading.
In the US, customers have recently been able to buy and sell bitcoins, bitcoin money, ether and litecoins through their PayPal accounts. You can also pay online using digital currencies. In the first half of the new year, PayPal plans to offer this service in other selected countries as well. The payment provider still leaves open which of them will be.
PayPal now also offers cryptocurrency trading in the United States. Photo: Alliance of Images / Arco Images
“For industry, PayPal’s entry into the cryptocurrency could have a signaling effect on other companies that have been considering the introduction of digital currencies for a long time,” says analyst Timo Emden. Like PayPal, Square and Robinhood Markets have already entered the cryptocurrency business. However, they do not have as many customers as Paypal with more than 300 million accounts. Therefore, consumers have so far had to register on special exchanges in order to buy Bitcoin and Co. But many avoided it. However, many of them already have a PayPal account.
PayPal buys bitcoins on a large scale
In order for a US payment service provider to enter the market, it must meet certain requirements: for every virtual bitcoin that a customer buys through the platform, they must actually hold bitcoin. It is as if the bank has to put a coin in the safe for every euro that the customer has in the account. In order for customers to trade in cryptocurrencies, PayPal must buy them in bulk – and it does. According to investment company Pantera Capital, PayPal recently bought about 70 percent of all bitcoins that came on the market. This could also have contributed to the recent price increase.
But while bitcoins are now easier for investors to obtain, consumer advocates are calling for caution. “The so-called We consider cryptocurrencies to be a financial investment for asset accumulation, ”says Niels Nauhauser of the Baden-Württemberg Consumer Advice Center. “Their value depends solely on the value that people will attach to cryptocurrencies in the future.” This also applies to paper money. But that is why there are also central banks behind the dollar or the euro, which control price stability and, in case of doubt, intervene fundamentally. Bitcoins, on the other hand, can only be used if you find a contractor who accepts them. “From a legal point of view, it’s not about money,” warns Nauhauser.
Are bitcoins comparable to gold? Consumer advocates say: No. Photo: dpa
Fans of cryptocurrencies, on the other hand, like to talk about digital gold: So they consciously buy bitcoins to become more independent of traditional currencies. However, consumer advocates see a fundamental difference from precious metals: “Unlike gold, for example, cryptocurrencies have neither material value nor historical price developments that could provide clues to risks and returns.”
Given the growing number of cryptocurrencies, the risk of irrational exaggerations in price developments is also high. In addition, depending on the platform, investors would not be properly informed about the risks before purchasing cryptocurrencies. “The sale takes place completely outside the legal framework of speculative investment,” says Nauhauser.