Author Mark Richards
Bitcoin has just passed $11,000 following a spectacular rise since the beginning of August. We now have our first ‘Bitcoin billionaires.’ But is it just a ‘bubble,’ destined to burst and lose a lot of people a lot of money? Or is Bitcoin here to stay?
At the beginning of August, we wrote an article about Bitcoin: if you would like to read it in full, here is the link. But re-reading the article over the weekend, one sentence leapt out and hit me between the eyes: A Bitcoin is currently worth around $2,800 – approximately £2,140.
Four months later, and one Bitcoin is now worth in excess of $11,000 (roughly £8,200). By anyone’s standards, that is a spectacular return and we now have the first ‘Bitcoin billionaires.’ Tyler and Cameron Winklevoss – who famously lost out to Mark Zuckerberg for control of Facebook – invested $11m in Bitcoin four years ago. Since then, the investment has increased by 10,000 percent.
So on this cold and frosty Monday morning is there only one logical course of action? Should we not sell everything we own and invest in Bitcoin? Or is Bitcoin just a bubble – destined to end in tears like Tulip Mania and the Dot Com Bubble?
So what is Bitcoin?
Bitcoin is a digital currency – sometimes called a cryptocurrency – which is created and held electronically. It became the first decentralised digital currency in 2009 thanks to an unknown software developer (or, more probably, a group of developers) under the name Satoshi Nakamoto.
Essentially, Bitcoin is the currency of the internet – distributed, decentralized, worldwide, digital money. Unlike a traditional currency – pounds or dollars, for example – Bitcoin is issued without any central authority: there is no government, bank or company in charge of Bitcoin: in theory, it should, therefore, be more resistant to wild inflation and (if there ever are any…) corrupt politicians and bankers.
The system is peer-to-peer so that transactions can take place without an intermediary. Bitcoin can be exchanged for currencies, products and services in both legal and ‘shadow’ markets. If you ever go shopping on the so-called ‘dark web,’ you are going to need your Bitcoin wallet.
Is Bitcoin here to stay?
As far back as 2015, it was estimated that at least a 100,000 merchants worldwide accepted Bitcoin, and an article on Bitcoin.com suggests that 260,000 stores in Japan now accept Bitcoin. Research by the Centre for Alternative Finance at Cambridge University indicates that there are up to 6 million unique users of a cryptocurrency wallet, most of them using Bitcoin.
You are not yet going to be able to walk into your local Costa and use Bitcoin – but the currency is becoming increasingly common in the West, especially in major cities. Do not be surprised to see Bitcoin debit cards and Bitcoin ATMs start to make an appearance in the not too distant future.
Will Bitcoin ever take over from real currencies?
It is more likely that Bitcoin will run alongside ‘traditional’ currencies. Cash remains an integral part of many people’s lives, but as Bitcoin becomes more widely accepted – and people become more knowledgeable about it – so we are likely to find prices quoted in both traditional and cyber currencies. Experts suggest that we are around five years away from Bitcoin being mainstream enough to be used alongside physical, ‘traditional’ currencies.
Interestingly the US financial regulator has just given two traditional financial exchanges in America permission to start offering ‘Bitcoin futures.’ I will not go into the technical details, but this does represent another step towards the financial mainstream for Bitcoin.
So is it a wise investment? Or just a bubble?
Let me stress that you should not read this article as financial advice: it is for interest and information only. Back in August, I wrote that Bitcoin is an extremely volatile currency. The current value of a Bitcoin is around £2,140 but as a senior analyst at eToro – the ‘social trading investment network’ – said, “Bitcoin could easily crash to $100 (£76) a coin or surge to $10,000 (£7,600) a coin or go anywhere in between.”
We now know which direction Bitcoin went in – but that does not make it immune to future falls. There are plenty of other virtual currencies, and we now have countries starting to consider their own virtual currencies.
And as we shall see below, history is littered with speculative bubbles. In October, Jamie Dimon, head of JP Morgan Chase, described investors in Bitcoin as “stupid.” More practically, in our increasingly energy-conscious world, one estimate suggests that the amount of energy spent in ‘mining’ (creating) and recording new Bitcoin transactions now consumes more electricity each year than is used by Ireland – and five times the output of Europe’s largest wind farm.
That does not sound like a practical or ethical basis for an investment. Maybe Bitcoin will go the way of tulip bulbs…
Tulip Mania and friends
The year was 1637 – and something extraordinary was happening. Europe was in the grip of Tulip Mania. At the peak – around March – some single tulip bulbs were being sold for ten times the annual income of a skilled craftsman. Let’s say that’s £30,000 in today’s terms – so a single tulip bulb was selling for £300,000.
It’s almost impossible to believe – especially as a quick search on Google tells me that I can now buy 100 tulip bulbs for £12.95.
And yet it’s true. Tulip Mania happened – and yes, of course, people were ruined and of course, the Dutch economy was brought to its knees.
Neither was Tulip Mania a one-off event. And sadly, “investors” in the UK didn’t learn from it.
Less than a hundred years later – in 1711 – the South Sea Company was founded, and given a monopoly on trading with South America. Vast profits were expected. The shares rocketed in value and people rushed to invest. But there was insider trading; company money was used to buy its own shares and keep the price up; large bribes were paid to unscrupulous politicians. (Plus ça change, as our French colleagues like to say…)
The only trading which did take place was in slaves – and the company managed to make a loss on it. In 1720 the share price collapsed. Hundreds, if not thousands, were ruined – and the UK economy was severely damaged.
There have been financial scandals, public greed and the madness of crowds ever since. I remember seeing a cartoon during the Dot-com Bubble of 1997-2000. A very stressed financial analyst was sitting at his desk, struggling with a report. “How the hell,” he was saying, “Do I write a 5,000-word report saying we’re buying these shares because everyone else is buying them?” Precisely.
But our stressed analyst may simply have been too early. Four years after the Dot-com Bubble burst, someone at Harvard founded a company called The Facebook – which as we all know, is now used by 1 in 4 people on the planet. Will Bitcoin – or another virtual currency – become so widely accepted? Quite possibly. But it will be a bumpy ride: do not be surprised if you wake up one morning and see the headline, Bitcoin crashes. Millions face ruin…