Three reasons bitcoin fever will rage on, even after this bubble bursts
Niall Ferguson says lessons from the South Sea Bubble show that the inevitable bust doesn’t necessarily kill the innovation. The financial innovation that created cryptocurrencies like bitcoin and the blockchains they are built on will continue to find buyers
“Listen, son,” I said, “that is no way to invest my hard-earned pounds ... The governments of the world are not about to let their monopolies on national currencies be undermined by a currency that’s already being used for nefarious purposes by criminals and money launderers.” Son: “Yes, but …” Me: “No buts – I’m not throwing real money down the virtual drain.”
It’s never too late to recover from an investment blunder, of course. But what if buying bitcoin now would make me the “greater fool” – the last man in, who gets left holding the bitcoin when the bubble bursts and the price plummets? Financial history is full of examples of investment manias that at some point turned into panics and crashes.
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“Bitcoin is a sort of tulip,” observed European Central Bank vice-president Vitor Constancio at around the same time. “It’s ... an instrument of speculation ... but certainly not a currency.”
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But tulip mania is not the right analogy for understanding bitcoin. As the South Sea Bubble of 1719-21 revealed, financial innovations are often accompanied in their initial stages by bubbles; the inevitable bust doesn’t necessarily kill the innovation. South Sea Company share prices may have inflated and then collapsed, but that didn’t spell the end of tradeable shares as financial instruments, they went on to become the foundation of corporate finance.
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Something similar will prove to be true of bitcoin and cryptocurrencies in general. It’s not so much that blockchain-based coins and tokens will replace the fiat money we have grown accustomed to using since the demise of the gold standard. Rather, there are at least three other uses for the new financial technology that will persist even after this bubble bursts.
At some point, no doubt, regulatory changes in the US will deflate the current bitcoin bubble. But they will not halt, much less undo, this financial revolution.
Niall Ferguson’s new book is The Square and the Tower: Networks, Hierarchies and the Struggle for Global Power