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The Bitcoin bubble?

29 November 2017

Don't you wish you'd got into Bitcoin right at the start?

The return on mining this currency with that old laptop or PC would have been well worth the effort to set it up but today, not so much.

When it first launched in 2009, the value of a Bitcoin was effectively zero in terms of traditional currency. Even by early 2011 it was still only worth about a US dollar per coin.

By 2013 you could buy Bitcoins for about US$22 a pop.

That still seemed pretty expensive for a currency that might or might not take off and be of some actual use but never the less, people began trading Bitcoin for cash and vice-versa. In fact during February of that year, US$1 million worth of Bitcoin was sold by one payment processor alone.

Ever since then, the value of Bitcoin has been increasing at a pretty impressive rate and the number of places accepting it as payment has also grown at a healthy lick.

Today, the value of a single Bitcoin is closing in on US$10,000

Late edit: Bitcoin passed $10K this morning.

Seriously?

What is driving this astronomical increase in the value of this currency?

Well it could be that people believe it is the future of monetary exchange and that its scarcity underpins its "worth".

Or perhaps its the way that this currency allows for more anonymity than a credit card or other form of payment, especially when used online.

However, I believe that the main reason people are investing in Bitcoin, and therefore pushing up the price, is simply speculation.

The rise in Bitcoin value parallels that of tulip mania that took place in 1637 where people traded contracts for tulip bulbs at outrageous prices because they knew that they could sell for more than they bought. This "bubble" created some fortunes and destroyed many more.

In November of 1636, tulip futures became "hot property", due to their novelty and the growing demand this created. Traders began a round-about of buying and selling that effectively drove the prices to outrageous levels. According to Wikipedia, by February of 1637, contracts for bulbs were changing hands as often as ten times per day and some single bulbs sold for more than 10 times the annual income of a typical skilled worker.

We have recently seen something very similar with the Auckland house market -- where demand and a burning desire to "flip" houses for a quick profit has pushed prices up to the point where they bear very little relationship to their actual value.

As with all bubbles, the tulip mania bubble burst and within weeks, you couldn't give the damned things away. All the perceived wealth that had been created evaporated and those who bought at the end were left penniless -- whilst only those who were lucky enough to sell for cash at the exact right moment walked away with their fortunes intact.

So I can't help but wonder if we're not going to see the same thing with Bitcoin.

When something undergoes a four-order of magnitude increase in value within eight short years, simply through being traded, that has all the hallmarks of a disaster in the making.

Of course I could be wrong (I often am) and Bitcoin may continue to grow in value forever -- but somehow I doubt it.

Have you got an Bitcoin?

Would you dare to buy any at the current price in the expectation that it will be worth more than you paid by tomorrow, next week or next year?

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