Abacus | Why bitcoin fever is a bubble waiting to burst
Optimism is high with the price of the cryptocurrency up 1,438 per cent over the past 12 months, but the very factor enthusiasts like most about bitcoin is also one of its biggest drawbacks
To be right too early is to be wrong. In July 2013, with bitcoins trading at US$100 each, the South China Morning Post argued that “if they were to gain wider acceptance, their value would soar”. However, the paper went on to warn that “there is a fatal flaw with the whole concept” of bitcoins as money, which meant they “will never catch on”.
Well, since then bitcoins have caught on with a vengeance, and their value has indeed soared. Last week the price of the cryptocurrency jumped to a high of US$11,434, up a spectacular 1,438 per cent over the previous 12 months, as hundreds of thousands of new users rushed to open bitcoin accounts.
Yet despite the electronic currency’s ballooning popularity, the criticisms the Post made back in 2013 are still valid, and in the intervening years a few more failings have become apparent.
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First off, it has to be said that the “blockchain” distributed ledger technology that underpins bitcoin is undeniably clever, and will no doubt find many applications over the coming years, especially in financial disintermediation.
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But the cleverness of the underlying technology doesn’t mean that bitcoin is viable as a form of money. And it certainly doesn’t mean that the legions of punters rushing to buy bitcoin as an investment for the future can be confident of earning superior returns, or indeed any returns at all.
Enthusiasts like bitcoins because their supply is limited. The pace at which bitcoin “miners” can create new units automatically declines over time, with the maximum possible number of bitcoins fixed at 21 million. To converts, that limit means that bitcoins, unlike the fiat currencies issued by the world’s central banks, can never be debased by governments intent on printing as much money as it takes to pay off their debts.
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Yet despite their scarcity, bitcoins possess no intrinsic value. Unlike hard commodities – copper, say, or even gold – bitcoins have no utility value. And unlike securities such as bonds or stocks, bitcoins do not carry the promise of a future cash flow that allows investors to put a hard figure on their value today.