Bitcoin may not make sense, but its bubble is not about to burst just yet

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This was published 6 years ago

Bitcoin may not make sense, but its bubble is not about to burst just yet

By James Titcomb
Updated

OK, we can all see it: bitcoin looks a lot like a bubble. It stinks of irrational exuberance: it is incredibly volatile, and not only does its price continue to increase, but it is doing so at ever accelerating rates.

It took 1789 days for bitcoin to go from nothing to $US1000. Then 1271 days to get from $US1000 to $US2000, and just 13 days to jump from $US6000 to $US7000, its latest milestone.

Individuals are selling their houses and giving up their life savings to put everything into bitcoin, seemingly more out of speculation that its price will continue to rise than because of any serious belief in its intrinsic value.

Many of the characteristics of a classic bubble - the fact that everybody is talking about it, extreme predictions about its future price, and the parabolic price curve - appear to apply to bitcoin.

With a rise in value from $US6000 to $US7000 in a mere 13 days, experts predict its ascent can't last - but are they right?

With a rise in value from $US6000 to $US7000 in a mere 13 days, experts predict its ascent can't last - but are they right?Credit: Bitcoin.com

For the record, I have no idea where bitcoin's price is going to go, and in no way do I endorse it. It is very possible - likely, even - to believe this craze won't last. But is the only way down? There are reasons to think not.

Everybody thinks it's a bubble

When a lot of bubbles pop - the real estate crash of 2007, or the dotcom crisis of 2000 - the aftermath is often characterised by complaints that nobody saw it coming.

But there is a cacophony of senior figures in the finance industry - including JP Morgan's chairman and chief executive Jamie Dimon, Tidjane Thiam, the boss of Credit Suisse and the much-followed veteran investor Warren Buffett - warning that bitcoin is a "fraud", "the very definition of a bubble" and "doesn't make sense".

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This isn't a situation where there are no safety warnings, almost everybody who people would usually listen to on this stuff say bitcoin's out of control. And yet, people are willing to ignore them. If nothing else, it suggests that the market is not easily spooked.

It's all a matter of timing

Bitcoin has been called a bubble for most of its lifetime. In 2011, when it dropped from a measly $US33 to $US2.51, The Economist noted that "the currency's rise was the result of a speculative bubble".

The arguments advanced against it were eerily similar to those now. The same happened in 2013, when it peaked at slightly over $US1000 - a seventh of where it is today.

Bitcoin has crashed before, in 2011 and 2013, but on both occasions, its price rapidly rose again. Looking back, you can hardly say now that it was a case of the bubble bursting.

One can argue it's only a matter of time, but on a long enough timescale, so is everything.

Kodak had a long and illustrious run before it went bust in 2012 - was it in a century-long camera bubble?

The total value of bitcoin, around $US100 billion, is tiny compared with other assets, so it might run for some time yet.

Indeed, the floodgates are only just opening to institutional cash.

There is some value to it

Critics of bitcoin say that apart from wild price swings and speculation, there's nothing to it: it's not a great way to pay for things, for example.

But it isn't exactly useless. The blockchain technology that underpins it is (at least in theory) useful for all kinds of things. Its decentralised nature makes the currency itself nearly unhackable.

And "initial coin offerings", a way for companies to raise funds using cryptocurrencies, do have some benefits (albeit a series of scams, hacks and raised eyebrows have not enhanced their reputations).

Admittedly these are uses for blockchain and cryptocurrency in general - not bitcoin - but as the best known and original implementation of the tech, it has the position of being a barometer for the rest of the industry.

Believe it or not, it is more stable than other assets

Bitcoin might look like nonsense compared to the (relative) stability of the US dollar or the British pound. But this isn't the case everywhere.

Google suggests that the countries with some of the most interest in bitcoin are Bolivia, Columbia, Nigeria, Slovenia and South Africa - countries that have been hit by inflation, falling currency values or expensive money transfer services.

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For many people in these countries, bitcoin may represent a safer, more stable and more convenient store of value than local currencies.

The Daily Telegraph, London

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