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Bitcoin is about to blast past $5,000 — and that's a problem

Bitcoin is continuing to blast through new records, apparently now on a run toward $5,000 per bitcoin. Counterintuitively, that may be a big problem for the cryptocurrency.

The rapid gains are great for holders of bitcoins, of course. In some cases, the daring souls who trade the currency on a short-term basis each day can also profit. (Though they can also lose big.) But for merchants and consumers — the people who might use cryptocurrency as actual currency in exchange for goods and services — bitcoin’s eye-popping rally severely limits its usefulness.


To put it a different way, bitcoin’s price is behaving more like a hot stock than a currency. The former you want to shoot to the moon; the latter you need to be as stable as possible, lest it become a distraction or even an obstacle in negotiating transactions for actual stuff. That’s why the Federal Reserve tries to keep U.S. inflation — which essentially erodes the value of a dollar — below 2 percent a year.

By comparison, bitcoin is up almost 400 percent this year. In traditional currency terms, we can think of that as negative inflation, or a deflation rate, for bitcoin. A massive deflation is not necessarily a good thing from an economic standpoint, however. It creates an incentive to hoard, not spend, any bitcoins you can get your hands on.

Which is exactly what speculators have been doing, especially since the successful rollout earlier this month of a big change to the underlying blockchain technology that works as a transaction ledger for bitcoins.

Going into the so-called “fork,” in which a new version of the blockchain was launched side-by-side with the old one, traders had worried about potential compatibility headaches. But none have emerged, paving the way for a 66 percent jump in bitcoin prices in August, including a fresh record near $4,800 on Thursday.

Other notable details about the bitcoin rally:

— Bitcoin is now within reach of the $4,827 near-term price target that Goldman Sachs analyst Sheba Jafari quoted to clients in a research note earlier this month. Once it hits that level, the cryptocurrency could be due for a corrective selloff, perhaps as low as $2,221, Jafari estimated.

— Bitcoin’s latest gains have pushed the total capitalization of the global cryptocurrency market above $170 billion in assets, according to the news and research site CoinDesk.

— Like gold, bitcoin has benefited from some traders buying it as a hedge against global political crisis. At times of unrest, it’s better to own assets whose value isn’t tied to government guarantees, the thinking goes.

At least one prominent gold bug isn’t a big fan of bitcoin, however. Money manager Peter Schiff, who famously profited after betting heavily on gold ahead of the 2008 financial crisis, said in a recent interview with CoinDesk:

“There’s certainly a lot of bullishness about bitcoin and cryptocurrency, and that’s the case with bubbles in general. The psychology of bubbles fuels it. You just become more convinced that it’s going to work. And the higher the price goes, the more convinced you become that you’re right. But it’s not going up because it’s going to work. It’s going up because of speculation.”