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Bitcoin - is this time different?

David Bassanese
24 October 2017

By David Bassanese

As an analyst of global financial markets, it is getting increasingly hard to ignore what was once just a plaything among computer geeks – the rise of so-called crypto-currencies such as Bitcoin.

Having witnessed the rise and rise in the price of Bitcoin, and the growing chatter about its rising status in the popular press, humble analysts such as myself have been forced to confront it and decide - is it worth the hype, or is it yet another in the long line of financial bubbles?

I’m no computer expert, but I am a student of economic history. And, as I explained to Paul Rickard on the Switzer show earlier this week, if it looks like a duck and walks like a duck – chances are it’s a duck.

By that I mean the parabolic price gains for Bitcoin in recent months – and its rising popular interest – bear all the hallmarks of classic bubble. Of course, interest in Bitcoin only recently appears to have made the transition from first-mover computer geeks to the general public, so that probably means explosive price growth could last another year or so.

I can’t say when the price of Bitcoin will collapse – it could yet double and triple in value before then – but history strongly suggests collapse it likely will.

BitCoin Price in $US

Source: CoinDesk.Com

Of course, many of those buying Bitcoin today also probably expect prices to fall eventually. All they know is that prices are rising, and momentum likely means prices will rise further still. Another name for this is the greater fool theory – I’ll buy now irrespective of price, because I believe there’ll be a bigger fool that will pay even higher prices later.

Why am I a sceptic? As the believers like to point out, the supply of Bitcoin is apparently limited.

There’s now 16 million units, and supply is growing by only a few percent per year, and will be ultimately capped at 21 million units. Even at a price of $US6000, the total market value of Bitcoins outstanding is only around $US100 billion, which is still a fraction of the US money supply – much less that of the global economy as a whole.

At the same time, legitimate transactional demand for crypto-currencies is apparently high and rising. One central rational is that, unlike with national currencies run by governments and complicit central banks, there’s apparently less risk of monetary debasement though the printing press. It’s also seen as relatively cheap and easy to make international payments than with global currencies, and transactions can be made with greater anonymity (which is apparently a social good?).

But all bubbles start with some fundamentals behind then. And as with the internet itself, the deregulated blockchain technology that keeps account of crypto-currency transactions will likely become a fundamental part of the economy of the future.

That said, whether we actually need competing crypto-currencies to take the place of fiat currencies is highly questionable. After all, there’s now enough evidence to suggest modern democratically elected governments don’t easily seek to debase their currencies – indeed, inflation remains stubbornly low across the globe. International electronic transactions using traditional credit cards and national currencies are getting easier and cheaper by the day. I also I retain a lot more confidence that the $US and the $A will remain at least as widely acceptable as a means of payment and retain their store of value (i.e. won’t depreciate up to the usual 90% seen in the aftermath of bubbles).

As we’ve seen in China, it also seems likely governments will eventually crack down on allowing crypto-currency transactions if its leads to concerns over monetary stability, tax avoidance and/or terrorism funding. And it’s hard to believe many of these so-called currencies won’t be subject to massive cyber attack.

But the death knell to the crypto-currency craze will be supply – which is what eventually kills most financial bubbles. America built too many houses during its housing bubble, and launched too many dotcom companies during its dotcom bubble. The Dutch grew too many tulips.

In this regard, I’d be dubious about claims of fixed crypto-currency supply – especially as Bitcoin (apparently decentralised power structure) already itself appears to be creating a number of offshoots, such as Bitcoin Cash and soon even Bitcoin Gold. Apart from Bitcoin, moreover, there’s now a multitude of alternative crypto-currencies vying for attention, such as Ethereum.

My message: enjoy the ride while it lasts, but don’t say you weren’t warned when the mania eventually ends. This time is never different.

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