Bitcoin is a bubble – but bubbles change the world

Bitcoins © Getty Images
Decentralised money is better than fiat money

Another day, another new high in bitcoin.

Oh, my goodness me.

When and where is it going to end?

Cryptocurrencies are the new dotcom

The price of a bitcoin is $4,250 as I write this. It’ll probably be $5,000 by the time you read it.

The comment is not quite as flippant as it sounds. Bitcoin rose 20% over the weekend – while all other markets were closed. Why shouldn’t it rise by a similar amount on a Tuesday or Wednesday?

It’s a tech. The tech is now established. More and more potential uses are being found for it. More and more investment is piling into it. More and more interest is being generated.

And it’s not confined to the West. It’s very hot in South Korea, for example.

Thus, as it has global interest, you can go to sleep and wake up in the morning to find it 20% higher. It’s actually easier for an Asian to buy bitcoins than US stocks.

Before our eyes we see the incredible wealth creation that is a result of limiting the supply of a currency – especially one that everybody wants.

At the end of June, with bitcoin at $2,500, I wrote a piece explaining how to buy bitcoin. However, I urged some caution as I felt, price-wise, things were getting a little ahead of themselves.

How sage I seemed. Within just a couple of three weeks the price had fallen 30% to $1,800.

What has happened since has blown the eyeballs out of everyone. The price has turned around and rallied some 150%.

Crypto is the new dotcom, folks.

Everyday there is some piece of news about some new hedge fund that is getting into crypto. And who can blame them? They’ve had a rotten time of it, by their standards, in recent years. Why try for 15% annual returns in the stockmarket, when crypto gives you 150% in under a month?

The number of cryptocurrencies out there is exploding. What was a million-dollar market, became a billion-dollar market that is now a $126bn market. It will soon be a trillion-dollar market. Bitcoin alone now has a market cap bigger than PayPal.

Every other day there is some new ICO (initial coin offering) that raises some double-digit, million dollar sum in a matter of minutes.

Some of these technologies may actually go on and do something. Most are the technological equivalent of sending some dodgy mining prospector wandering out into the bush with a donkey and a shovel while the financiers rub their hands together at the $20m that just got deposited in Panama.

So where does it all end?

Nobody knows the answer to that, of course. It’s a speculative bubble. It could pop tomorrow or in five years’ time. But here’s why it has the potential to go on and on.

Fear of missing out is set to trump fear of losing money

The first thing I’d say, on an individual level, is that there are still so many people who are not in on the game.

Every day I get some kind of message from somebody kicking themselves about how they’ve known about bitcoin for years, but for one reason or another – cynicism, laziness, too busy, lack of belief, didn’t think it would go this high, not wanting to buy in after it has already run so far – did not get in.

Equally there are swatches of early adopters who doubled, tripled, quadrupled or even made a hundred times their investment and sold – and thus sold too early.

Then there’s the larger majority who are only just learning about it now.

Then there’s the institutional money. Those who manage that money will be in the same boat as the rest of us – missed out, sold too early or are new to it.

I was involved in an Aim start up called CoinWorks a couple of years ago. It never got off the ground because we couldn’t raise the required £3m or whatever it was we needed to get the thing listed.

I remember giving talks saying crypto was going to be bigger than dotcom and that we would be getting in right at the beginning of the hype cycle. Investors, from private to institutional, nodded wisely in agreement and then didn’t put their hands in their pockets. £3m! It seems like nothing now. I dread to think what an Aim-listed crypto investment fund would be worth today. If only.

I got hacked many years ago and had some bitcoins stolen. It angered me at the time – but more because they’d got into my email account than for the value of the actual coins (I think I had 13 nicked). I even have the email address and the IP address, which I traced to some offices in Soho, of all places, of the person who hacked me.

The police weren’t interested. The actual value of the bitcoins wasn’t that high, so I let it go.

It would be over fifty grand now!

There are so many stories like this of people missing out in some way. I’m sure you reading this are undergoing a similar rush of misery as you look back at the last five years and think: “Ten grand and I’d now be on Britain’s billionaires list”.

That’s the point – there is still a huge amount of money on the side lines, the world over, that wants in on the game.

The top of this market could be a long way off

Where’s the top? Forget any standard valuation measures. Forget traditional volatility or momentum measures. They won’t work. Even shoeshine-boy indicators won’t work – because crypto has been created by shoeshine boys and outsiders.

Indeed, who are bitcoin’s shoeshiners? Not kids, for sure. If anything, it’s the technophobic older generation.

Perhaps we have to enter the non-scientific realms of instinct and educated guesswork. The fact that every spam email or ad in my inbox, every ad I read on a website, seems to be telling me how to get into crypto is a major warning sign.

Then again I remind myself that the whole world wants in on this game – and isn’t yet in on it. There is further room for the bubble to grow. And I have found it always pays to remember my definition: a bubble is a bull market in which you don’t have a position.

But, eventually, this could easily pan out like dotcom. The bubble will get wilder and bigger than anyone could have ever believed. Then for no apparent reason it will pop.

Within a year crypto will lose 75% of its value. Decadence will be punished. Scams will unravel. Bankruptcies will be commonplace. Reputations in tatters. And the world will wonder how it can possibly have been so stupid.

The disruption of the disruptors

But in the meantime, an entire new technological infrastructure will have been built ­– an infrastructure which, like the internet, will change the way the world works.

Bubbles got the railways laid. Bubbles got ships built in the 18th century. Bubbles brought the internet to everyman. Bubbles are fast-forwarding crypto. Bubbles are not all bad.

The other day I mentioned on Twitter that with all the censorship currently being employed by Facebook, Google et al, how long before we have a decentralised YouTube? I’d invest.

Immediately I got a link sending me to something called BitChute. I have no idea if BitChute is any good. I haven’t had time to even look at it. But I do know that, ultimately, those who want to speak will go where speech is free. The uncensored will usurp the censored. Indeed, Google got where it is as it was a force for free speech and expression.

The decentralised model is better.

Decentralised money is better than fiat money. Decentralised video sharing will be better than YouTube. Decentralised social networking will be better than Facebook and Twitter. Decentralised domain-name registration and website hosting will better than GoDaddy. Decentralised search engines will be better than Google.

Bitcoin has laid the way for decentralisation.

So what happens to these companies – Google et al – when people start using alternatives? They will experience the same disruption they inflicted on others.

What happens to government tax revenue as more and more people use cryptocurrencies to make and receive payment, when previously they used fiat? Taxes will be harder to collect – and so government will find it harder to function as it now does.

The growth in bitcoin and its decentralised offshoots points to a huge power shift in the way the word is run. Many large corporations and governments seem oblivious as to what is coming.

Investors meanwhile need to go in with their eyes wide open. Caveat emptor. This is a bubble. But it’s also the future. Bubbles often are.

  • Richard Tavener

    Good article, Dominic.

    IMHO, Bitcoin and all the other cryptos and pennycryptos will only gain credence when they’re widely accepted as a method of exchange. If today I went into a car showroom and told the dealer that I’d pay for my chosen vehicle in Bitcoin, he’d almost certainly call for the men in white coats and think that I was either a lunatic or a crook in which case, he’d call for the boys in blue instead !!

    I’m reluctantly prepared to forgo what could be colossal profits as cryptos can collapse to virtually nothing as you’ll know, of course, as well as rise by astronomic proportions. Given how world governments have trashed their currencies with QE and punters in general therefore mistrust all traditional forms of money, I do believe that Bitcoin’s day will come as a universal method of exchange but when ?! Until then, my risk threshold is insufficient to accommodate the wild price gyrations of cryptos and I’ll probably only get involved once it’s too far too late to make a handsome profit by trading it. I’d prefer to use it to buy / sell the goods which I want or don’t want as the case might be.

    • pkop4

      Please read most of the articles on this website, particularly the early ones discussing the philosophy behind Bitcoin. The one titled “Speculative Attack” addresses the journey Bitcoin is on, and will be for a while.

      http://nakamotoinstitute.org/mempool/

      It is akin to digital Gold, and it is sound-money (finite, immune to central banks expanding money supply etc.). It will be hoarded / held because it will appreciate in value, until it usurps some significant percentage of “bad” money (fiat).

      When people have 2 or more currencies (USD, Bitcoin for example) they will spend the one that is depreciating in value, and hold the more valuable one, following the principle that “Good money drives out Bad”.

      Bitcoin will not be widely exchanged until its “S-curve” of adoption passes through the exponential period, and flattens out at its pinnacle. When the value stops appreciating in huge waves, then people will desire to spend it.

      But there are only 21 Million coins that will ever be mined! There are not enough Bitcoin for even every citizen of the state of Texas to possess 1 Bitcoin! (Let alone the world…). Now, fractions can be purchased and possessed..

      If you just imagine that Bitcoin absorbs some small percentage of lets say the Gold market, or even a portion of cash money supply (even bigger)…… then the price per Bitcoin will be **MUCH** higher than it is now… so we have a long way to go. Until we get there, you’re not going to see a ton of transacting, because the smart money will hold.

      Advice: Buy a small amount (until you are more knowledgable and comfortable).. just purchase 1 or even a fraction of 1 Bitcoin.

      And HOLD!!. Hold it for years. Write it off. Don’t even think about spending it.

      **IF** Bitcoin succeeds to even some degree of its possible potential, you will not regret putting in a few grand.

      See here: “The Potential value of (1) Bitcoin”

      https://www.deepdotweb.com/2016/03/24/potential-value-bitcoin-exciting-contemplate/

  • Bryn Bird

    I totally agree with your article and a couple of years ago I even bought your book “Bitcoin”. I got as far as getting myself a wallet then got stuck in the process of actually trying to buy some Bitcoin. I got distracted by the real world and by the time I got back to having another try at buying Bitcoin I had lost the details to get access to my wallet. Thank goodness I failed to buy any Bitcoin as I guess I would have lost them irretrievably. I have thought of having another try but in the meantime I have been getting to understand a bit more. My understanding goes like this. Bitcoin exchanges are recorded in blocks in multiple places all around the world. The exchanges are energy consuming and relatively slow and consume a lot of data capacity. We haven’t got very far yet in terms of the proportion of the world in on the Bitcoin game and it seems to me therefore that somebody needs to consider the point at which the data distribution and consumption of data memory capacity starts to clog up the whole system and what happens then. Perhaps I’m just being ignorant but I’m keeping out until I get these issues resolved.

  • John Roycroft

    Thanks to Dominic’s article 2 or 3 years ago I set up a virtual wallet with Blockchain.com and eventually Kraken.com, although it is only since June this year that I have been buying significant amounts of Bitcoin and Ethereum. I have moved onto the Ledger Nano S hardware wallet and I buy from bittylicious.com. I am about 90% up and will add to my holdings of Bitcoin and Ethereum if they experience another sharp drop. I have about 1% of my total worth invested which is enough to make reasonable gains if they carry on going up but it won’t be a disaster if they crash. I have no idea if cryptos have a future but I do know they are currently in an upward trend.

  • Bitcoin

  • jaizan

    I am not touching this.
    Well at least not until:
    1 it has a track record of about 200 years
    2 I can figure out how to value it
    3 I figure out why it cannot go to zero.

    • pkop4

      There will only ever be 21 Million Bitcoin mined. This is a hard rule.. that will never change (users / miners would never approve it.

      On that note, here is a breakdown of the “potential” value of 1 Bitcoin in the future, depending on what proportion of other money types it “absorbs / replaces”:

      https://www.deepdotweb.com/2016/03/24/potential-value-bitcoin-exciting-contemplate/

      https://www.lombardiletter.com/a-potential-20-bagger-500000-bitcoin-price-target-set-by-analysts/10265/

      If you think there’s even a slight chance of this happening, buying 1 BTC for a few thousand at this time seems like a no brainer.

      It probably won’t go to 0 because it’s already gone through many bubbles, and fallen.. and still keeps rising. It would have already failed if those would have been damaging bubbles.

      The software, and algorithm WORK. It has been working for years. There are billions at stake within the system, and yet it works and is not vulnerable to forgery, hacking, government or central banks cutting it off (too distributed around the world, like the internet).

      It is a secure, finite money supply, that can be sent quickly and easily anywhere around the world.. This in and of itself is its inherent value. The only question now is.. how much of inferior (especially fiat) money’s it absorbs / replaces.

  • Triple H

    I’ve been asking this before and will ask again. Who says the governments are going to take it lying flat? The governments the world over are mostly run by crooks of one kind or another in bed with various vested interests. There’s going to be war and carnage imposed on the populations in any event that leads to the governments losing control over the money supply. My prediction is that Bitcoin and others will make some people extremely rich, most will lose out eventually because its legal use will be banned the world over. But the underlying technology will be used by the governments to assert even more control over the finances of common folk.