The View | Bitcoin’s fabulous rise ... will eventually end in tears
‘Despite the warnings, I have no doubt that cryptocurrencies will continue to grow as did Tulipmania, and the South Sea Bubble’
It is a feature of all bubbles driven by the herd to find that many wise, high profile and analytical financial observers are their most ardent supporters. The rest of the crowd are blinded by greed or gripped by the fear of missing out. So it is with bitcoin.
The proponents of bitcoin, and the other 800 or so other cryptocurrencies, look on this brave phenomenon of the digital world as something new and original. Indeed it has many attributes as a cash alternative. It provides a quick and anonymous payment mechanism using a weblike method of transferring payments known as blockchain. The ledger, or book of ownership, can be updated in real time and held on different computers around the world – visible to all. This already puts us on the first rung of delusion because, doing the same thing in a much smarter way than we could before, imparts an aura of credibility to the process.
Bitcoin does boast many of the characteristics of money. It is a medium of exchange, portable, divisible and uniform (what bankers call fungible). It may be said to be a store of value, like shells, beads, cows and tulips. The Semper Augustus tulip bulb, once had intrinsic value, selling for five hectares of land – but no more; only gold has maintained a value throughout financial history.
The fatal aspect lacking from cryptocurrencies is the backing of a central bank, which has all of the economic, military and intellectual resources of a nation to support it. At this observation, many bitcoin enthusiasts will be holding their sides with mirth pointing to the hyperinflation of Weimar Germany or Zimbabwe. They observe that accepted currencies like groats or denarii have disappeared and, out of the 140 physical currencies in circulation a century ago, few remain to pay their holders. In inflation adjusted terms, the Swiss franc has lost 75 per cent of its value, the US dollar 95 per cent, and the pound 98 per cent.
Nevertheless, modern currencies backed by a nation are the best bet for providing a respectable currency base for the next century. The bitcoin community is already squabbling about whether to change the rules of mining and trading. New coins are invented daily and used as “currency” to raise money for all sorts of projects; some not fraudulent. A currency that is as volatile as bitcoin cannot be used from day to day – bitcoin has fallen 25 per cent from its high of nearly US$5,000 per coin at the beginning of this month.