Bitcoin, Madness of crowds
Finance

The other day I ran across a BBC report, on how African millennials have been caught up in the bitcoin frenzy. The more I read about bitcoin, the more am convinced it’s nothing more than a speculative financial bubble. In 2017 March when I started tracking down bitcoin price it was trading at $1000, by June it had spiked up to $2000, quadrupled to $4000 by August and 19-fold increase from March to December to $19000.

The most spectacular bubble ever recorded was in the 16th Century, tulip mania. Tulip mania was a period was Dutch Golden Age in which the contract prices of tulips (Bulbs) reached extraordinary high levels and they dramatically collapsed in February 1637. Its highest the price of a single bulbs had peaked to 1100%. It was not until the 18th Century that Charles Mackay documented the first ever speculative bubble in his book titled; Extra Ordinary Popular Delusions and the Madness of Crowds. After finishing 2017 up – 1300% the bitcoin bubble had completely eclipsed the tulip mania. The crytocurrency’s market capitalization now stands at US$229 billion globally, against 200 trillion dollar valuation across other traditional asset classes (Bonds, stocks and cash). Needless to say, if and when the bubble bursts only a tiny percentage of investors will be wiped out.

Bitcoin is a cryptocurrency and a worldwide payment system. It is the first decentralized digital currency, as the system works without a central bank or single administrator. Bitcoin was founded by a ‘ghost inventor’ only known by a pseudonym Satoshi Nakamoto. Bitcoin has several limitations that make susceptible to collapse, it has no intrinsic value, it’s not an effective store of value and not a reliable medium of exchange due to its speculative nature. The above characteristics makes a currency acceptable legal tender, as fiat money.  Fiat money is currency that a government has declared to be legal tender, but it’s not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. (Source: Investopedia).

Central banks globally issues out legal tender and it is in their core functions of monetary policy to regulate and control the quantity and velocity of money, however, Bitcoin as a crytocurrency cannot be regulated as it is governed by blockchain technology which is outside the purview of any central bank.

The US Treasury Secretary Steven Mnuchin recently likened Bitcoin to a Swiss Bank Account, it is purported that criminals and rogue nations will use bitcoin for money laundering and to evade economic sanctions. Bitcoin is likely to suffer some price losses as regulatory overtures are quickly being taken up by several countries across the globe, China has already enforced a crackdown on the trading of the cryptocurrency and South Korea has just followed suit. It is quickly been realised that bitcoin is a fad, you can only derive value once you sell bitcoin, once the value begin to decline they will a mad rush on the sell and consequently a crush.

These regulatory overtures coupled with oscillatory spikes with bitcoin price will spark beginning of the end of bitcoin. As a consequence it was no surprise that Deutsche Bank’s 2018 outlook listed bitcoin among the top 30 biggest risks to the market.

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