June 12, 2018
Let us first find out about the bitcoin itself, and how it operates in the financial world. The following article does not provide any form of financial advice and should not be used to base financial decisions off of.
A digital currency called ‘bitcoin’ was created in 2009 by Satoshi Nakamoto, a person of unknown identity.1 Bitcoin or BTC, a cryptocurrency, differs from traditional money used in transactions because its transaction costs are less, and its operations are not centralised unlike currencies issued by governments. The current market value for all Bitcoin circulating is estimated to exceed USD7 billion. A digital central ‘ledger’ located in a cloud and backed by powerful computers keeps track of all the balances of digital bitcoins, and ensures the entire system is not compromised. Although bitcoins are not legal tender, they have become extremely popular.
Some investors are of the belief that this digital bitcoin might be the currency of the future because it encompasses a rapid, no-fee, global transaction system. Despite the fact that the bitcoin does not have the backing of any central bank or government, it can be exchanged for the usual currencies such as the US dollar. This fact is usually used to attract investors when they see the increasing dollar value of a bitcoin. 1
The bitcoin began to grow rapidly in value in May 2011, and this was repeated in November 2013. For this reason, people purchased bitcoins from an investor point of view, rather than using it as a currency. Because the bitcoin’s value is not guaranteed, and because it is a digital currency, there are many risks involved. In fact, several agencies have issued alerts to investors. To add to the uncertainty, bitcoins have not had a long track record when compared to the traditional currencies. 1
Bitcoins are competing with government currencies, and because it is not regulated, it might be abused and used in the background for all sorts of illegal transactions such as money laundering, black market activities, and even tax evasion, and because of this many governments would like to ban the use of the bitcoin, and this has already happened in some countries. 1
Due to bitcoins being completely digital, they will always be at risk for cyberattacks. In addition, what about any computer malfunctions – nothing is absolutely perfect. In fact in 2014, a Bitcoin exchange in Japan had to close down owing to the theft of bitcoins worth millions of US dollars. 1
With the foregoing serving as a background, let’s discover whether or not the Bitcoin is a bubble.In August 2017, the Bitcoin price rocketed from USD12 000 to USD 15 000, begging the question if the bitcoin is indeed a bubble. 2 Two experts, experienced in the history and economics of past bubbles, saw a very similar parallel between past currency bubbles and the Bitcoin bubble. Past bubbles were caused by either new technologies such as the invention of railroads in the 1840s, or by new financial systems. For instance, financial engineering caused the 2008 financial collapse. The existence of the Bitcoin can be attributed to new technology and to a new financial system.
No one knows the possible outcome of any new financial technology. ‘The proof lies in the eating of the pudding,’ the saying goes. Only time will tell what will happen in the end. Will the Bitcoin be like a shooting star across our financial skies? No one is able to predict when that should happen. Perhaps the huge hype and emotion that goes with the current Bitcoin rush may well cloud investors’ minds from reality.Like with any bubble, there is just too much emotion and volatility. As ‘success stories’ of instant wealth begin to spread, more and more investors will be enticed to join in, thereby feeding the bubble. 3 Despite this spectacular growth, just some negative event can lead to investor panic, causing a market crash, and the bubble to pop. The exact value of the Bitcoin eludes investors, precisely because the Bitcoin does not earn interest or dividends. For this reason, the current volatility makes sense. 2
The tulip bubble is one of the most famous of all bubbles. Tulips had been introduced into the Netherlands from Turkey in the 1630s, and because it was such a novelty, investors got all worked up in their coffee houses, and artificially inflated the price of the flower to the point where the bubble burst and everything collapsed. 2
Because of the uncertainty and volatility of the Bitcoin, we would like to recommend that great caution be exercised with regard to any dealings with the Bitcoin. The above information is not to be taken as financial advice and must not be used to make financial decisions based upon.
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March 25, 2020