We’ll all get burned by bitcoin

Bitcoin fire © Alamy
Bitcoin: on fire right now, but what happens when it flames out?

Over the last 12 months, bitcoin, the digital currency, has been on an extraordinary surge. Last week, it broke through the $4,500 barrier for the first time. Since the start of this year, it has more than quadrupled in price, rising from $1,000 a coin to more than four times that. Over a 12-month period, it has risen almost eight-fold. There appears to be no stopping it right now. It would be no great surprise to anyone if it hit $8,000 by the end of the year, and $10,000 soon afterwards.

Bitcoin is fast establishing itself as mainstream. You can buy and sell just about anything you want with bitcoin. So it makes sense they should be rising in price. But hold on. An 800% rise in the space of a year? Quadrupling in value in a little over six months?

An 87% gain in single month? That is not a normal rise in the price of an asset. It is a wild, speculative bubble, and we have a couple of hundred years of financial history to tell us how those usually end. This matters, and not just to the relatively few people who actually own some bitcoins. Here are three reasons why.

First, like any speculative mania, it will lead to manic over-investment. If you have some spare time on your hands, and know your way around a PowerPoint presentation, then you should be putting together a pitch for a crypto-currency start-up. A half-plausible idea, and you should be able to trouser a seven- or eight-figure round of venture-capital money by the end of the week.

Capital is pouring into new currencies at an accelerating rate. We saw something similar in the dotcom bubble, and in every other investment boom before that. A huge amount of capital that could have been better deployed elsewhere will be wasted in the process – and we will all be worse off for that.

Second, the boom tells us that manias are back. We already knew that we were well into an exceptionally long bull market. In any long upwards run in prices, there is always one asset that goes crazy, and ends up becoming a signal that the whole market had become wildly over-exuberant. It was sub-prime mortgages last time around.

Before that, it was internet stocks, and if you go back even further it was radio or railway stocks. Everyone piles in and the price explodes. But when you look back a few years later, it is clear that it was the price of that asset that was telling us that the whole market had become unhinged from reality, and was about to collapse.

Finally, a crypto-currency is exactly what it says it is. A form of money. True, it is not huge in terms of value yet. All the bitcoins in the world still only add up to about $50bn (or possibly $60bn by the time you are reading this). That is a lot less than GlaxoSmithKline is worth, to take just one example. In terms of the size of the global capital markets, it hardly even registers.

Apple has a market value of more than $800bn. All the gold in the world has a combined value of an estimated $8.2trn. The US bond market is worth $31trn. The digital currency does not get anywhere close to any of those.

Even so, it is still a form of money, and, day by day, it is being integrated into the financial universe. As we learned in 2008 and 2009, once one part of the monetary system starts to wobble, then the whole edifice can suddenly look very shaky.

We don’t really know what contracts have been linked to cryptocurrencies, what derivatives have been hitched to them, or how deeply they have been embedded into the financial system. One thing is for sure, though. In a crash, we would find out very quickly – and the losses might ripple out in unexpected ways.

  • ocmone

    Correction: the combined market cap of all cryptocurrencies is $150bn. Bitcoin alone is at more than $70bn.

  • The_World_Will_RIPPLE

    This isn’t a bubble. We are living through the dawn of a new Revolution. Bitcoin hasn’t even got out of first gear!

    • Peter Edwards

      Your statement my friend is confirmation of a bubble.

      • Bittylicious

        What I find funny is the way that Bitcoin is assumed to be a bubble, and then is compared to global worth of financial markets and gold, which surely implies that there is an awful lot of potential to this “bubble”.

      • inpips

        Unless bitcoin is a disruptive tech that achieves wide spread adoption.

      • Zac Sand

        You’re a paid troll, you don’t have any friends here.

        • Peter Edwards

          I subscribe to this mag to make money not friends.

      • The_World_Will_RIPPLE

        I’m sorry but like many others, you seem unable to understand the fundamentals and grasp the benefits. Look at the adoption rate and interest of Governments around the world, that alone should be a wake up call for you.

        • Peter Edwards

          I probably grasp this a lot better than most of you here.

          if you change bitcoins to tulip bulbs then your arguments look the same.

          Like the heady early days of the internet lots of companies with high valuation went to zero on a downturn.

          Crypto Currencies are no way ready for the mainstream and I bet the coin of the future has not even been invented yet

          What exchanges are safe, why has bitcoin split. can a block chain be hijacked, how does joe public keep their money safe when even hardware wallets can hacked.

          You only have to look at the wild swings of the crypto currencies that some are going to go to zero.

          I blame the central banks crazy monetary polices for making people believe in bits.

          • Tom Mornini

            > if you change bitcoins to tulip bulbs then your arguments look the same

            Oh, please, save us the tulip analogy.

            The biggest, but not only, reason you’re wrong is that anyone can make any number of tulips, but nobody can make more than 21M bitcoin.

    • Zac Sand

      So true, Bitcoin is replacing an obsolete model.
      By the authors logic telephones and the automobile would be “bubbles”.

  • webbywizard2

    I think it would be better to state that btc is exhibiting traits of a bubble. That much is true. The bigger question is, whether it is a genuine bubble or possibly the start of a destiny that bitcoin could fulfill. Please do not make the mistake of including bitcoin with the same bubbles as dutch bulbs, florida land grabs, etc They were bubbles that were unsustainable because of there obvious and demonstrable limits. Bitcoin is different. It has the potential to shape our world in the same way as the internet has Cryptocurrencies are here, they are here to stay, it all depends on who will be the eventual supreme adoptee. Will bitcoin be the netscape navigator of cryptos, maybe. But be in no doubt bitcoin or some other crypto will be being used by everyone within 10 years, possibly 5. That is before we talk about it as a store of value and whether the use of other cryptos such as ethereum and smart contracts completely revolutionize business contracts on the internet.

    • Tom Mornini

      I suspect it’s exhibiting the behavior of an extremely rare commodity of inelastic supply that’s becoming increasingly desirable to a wider range of individuals.

    • dfjkbvdjkf

      “the start of a destiny that bitcoin could fulfill.”
      An interesting idea. Although the article states “You can buy and sell just about anything you want with bitcoin” there was an article on Slashdot (a forum for geeks who KNOW) that says the opposite: Bitcoin’s biggest problem is that you can’t actually buy anything with it – the retailers that once accepted it are becoming fewer.

      Couple that with the technical difficulties of actually making a transaction and the there does seem to be a bit of “Version 1” (and we are constantly told: never buy version 1, wait until the problems are ironed out – let other people find the faults and lose their money) about Bitcoin.
      I just wish I’d spotted it’s future worth when it was a few ¢’s per Btc!

    • Russell Spears

      I don’t think any bubble has ever had as many corrections as it has had increases in value.

      I suspect at some point a lot of money managers are going to be sued for dismissing a very significant investment opportunity.

  • Mike McCormick

    This is extremely poorly written. Based on all its inaccuracies, it may be safe to safe bitcoin can feasibly be valued more than Apple, Microsoft, Walmart, Amazon and google combined.
    You don’t have to invest in it , you can simply utilize bitcoin. Quite obviously it is authentic and awesome.

  • MC Kuky

    Bitcoin is now corporate controlled and no longer P2P, cheap and usable, or decentralised payment system. Bitcoin Cash continues that legacy now.

    • Bittylicious

      This is FUD, and the market appears to be giving Bitcoin the upper hand.

    • Russell Spears

      Bitcoin cash is clearly centralized because they’ve been capable of updating it very quickly and without much fanfare

      • MC Kuky

        Mate, you logic stinks. Did you even go to school?

        • Russell Spears

          NO, your logic sucks. Anything that can be easily updated is too centralized!

          • inpips

            To be fair blockstream control bitcoin core which is why some object to blockstreams answer to scaling, instead preferring satoshis’ vision ie BCH

            • Russell Spears

              Satoshi was not God.

              Whoever Satoshi was or is they handed Bitcoin over to humanity and the free market.

              The majority of what Bitcoin is today is due in large part to the free market.

              • inpips

                Satoshi was not God agreed

                And I agree Bitcoin was handed over to a free market, however as you know a free market is not a cult, or a blockstream monopoly on Bitcoin code.

                Bitcoin Cash is a hard fork. Hard forks are the answer to a group trying to control Bitcoin.

                Lets hope the best chain prevails and Blockstream hasn’t damaged Bitcoin adoption beyond repair.

                At the end of the day we all know either chain is better than fiat, a chain that people can transact on is my preference.

                • Russell Spears

                  Bitcoin is dealing with the centralization through the free market: The forking was not an issue at all, it was bitcoin responding to attempts to control it, and the Bitcoin Gold fork will be a free market solution to the attempts of Bitcoin Cash supporters to hand over this technology to centralized whales and the new plutocracy.

                  Bitcoin is married to the free market nicely, let it play out. But be clear, the real Bitcoin community does not like manipulations or its supporters!.

                  Many are holding BCH as a hedge too and If true this new bitcoin Gold will be a clear end to bitcoin Cash.

                  IF true Bitcoin Gold will be your better option! IT will be more in the spirit of Bitcoin than this plutocratic takeover called BCH could ever be.

                  BCH is dead if Bitcoin Gold forks. Now that fork, I can support! Because they are not trying to kill Bitcoin or take it over and they are trying to make it more decentralized! Two for one!

                  • MC Kuky

                    Wow, now you call your BTC as Bitcoin Gold? How you people keep coming up with new propaganda labels is just funny… its like how military industrial complex keep changing labels to make their mass murder less humanized… instead of soldiers they call them combatants, civilians as collateral damage. You people just stink.

                    • Zac Sand

                      None of that makes sense, can you clarify a little…?

                    • Russell Spears

                      You most definitely cannot talk about propaganda if you’re supporting any of these traditional Finance schemes even the ones that involve precious metals.

                      And don’t conflate Bitcoin with Bitcoin gold.

                    • MC Kuky

                      So what is Bitcoin Gold now and where did it come from? I admit i didn’t know what it is, first time I heard about it I thought Core want to rename it into Bitcoin Gold or Bgold but actually they want to create (what they call a “friendly”) fork of Bitcoin and create this Bitcoin Gold… which is bloody… garbage.

                      I think they are doing this because they know Bitcoin will fork in November and miners will create 2x from the SegWit2x part… which they know will kill their Bitcoin as they will lose all the hashing power. Miners will either start mining SegWit2x or switch to Bitcoin Cash (it is my guess also what they will do, I hope they start mining SegWit2x first to teach Core a lesson and kill their (now centralised) Bitcoin, and then switch to Bitcoin Cash… but I might be wrong and they just stick to SegWit2x… time will tell.

                      So I think Core are doing this (wanting to create Bitcoin Gold) as to avoid them being destroyed as their product of Bitcoin cannot live on as is not usable as digital money… yet this is what its meant to be… until they manipulated the code and now destroyed its usability. With Bitcoin Gold they think they will have an alternative product, one that see as store of value only.

                    • Russell Spears

                      Honestly I think Bitcoin gold is going to try to retain a lot of the original Bitcoin… I believe it’s going to only be available for graphics card mining.

                      These forked altcoins are starting to look more and more interesting because they are going to offer a hedge against risk in the core Bitcoin.

                      But that being said I still do not think that Bitcoin cash represented a significant Fork.

                  • Zac Sand

                    Your right, Bitcoin has taken on a life of it’s own.
                    A living cybercreature.
                    Long live the Bitcoin Symbiote!

          • MC Kuky

            You are an idiot.

        • Zac Sand

          They have a Bitcoin school?
          Post a link!

    • Russell Spears

      The only token that looks to be centrally controlled is Bitcoin cash.

      Bitcoin is first and foremost a store of value and it has proven quite useful in this area everything that it will be will be built upon this fact

  • Tom Mornini

    > An 800% rise in the space of a year? Quadrupling in value in a little over six months?

    > An 87% gain in single month? That is not a normal rise in the price of an asset.

    No, it’s an extraordinary rise…

    I’m confident that many tech stocks have had such gains pre-IPO, and some probably have post-IPO.

    Were they in a bubble as well?

    The difference here is anyone can invest, anywhere in the world, and there’s an absolutely fixed quantity of them.

    Bitcoin has a very long way to go.

  • Russell Spears

    Your witnessing nothing less than a total financial revolution in its infancy. Bitcoin is going to eat the the big boys lunch. And soon enough it will be painfully obvious that the traditional money managers are not exempt from a horde of lawsuits claiming that their clients portfolios were mismanaged by not taking a good 5% investment in Bitcoin.

    AND THEY WILL BE RIGHT TO DO SO!!!!!!!

  • daflex

    It was in a ‘bubble’ when it was at $30 and I’m sure it will be in a bubble when it $25K….

    • Zac Sand

      2020 HEADLINE NEWS
      “One million dollars per Bitcoin is a bubble” banksters grumble sulkily on their 900′ yachts.

  • daflex

    Yet the $1 in your pocket probably equates to $100,000 worth of debt and that’s fine Aparently. ….

  • inpips

    The CC market is frothy especially alt coins but there is a massive difference between a bubble and an exponential growth curve. It would be impossible for Bitcoin or any other disruptive tech to achieve mainstream adoption without going though such a curve.

    As the author says bitcoin is less than 1% the value of Gold. Some say bitcoin is more useful as money than Gold as it can not be counterfeit, has zero storage fees and large sums can be sent securely to anyone in the World in minutes for pennies.

    Will it be a bubble if it reaches parity with gold at $400,000? Is Gold in a bubble?

    Watch this space.

    • Russell Spears

      Bitcoin cannot be debased with tungsten metal

      • Mike McCormick

        I’m getting burnt by Bitcoin , it’s on Fire !

        • Zac Sand

          LOL!

      • Peter Edwards

        But it can rendered useless with a hack.

        • Russell Spears

          Bitcoin cannot be simply hacked.

          They can hack any single server but Bitcoins more than an individual node.

          • Peter Edwards

            Bitcoin exchanges have already been hacked and millions stolen,, a rogue government or institution could easily take billions.

            • Russell Spears

              The exchange is just like any bank: YOUR NOT TALKING ABOUT BITCOIN BEING HACKED! Not sure why people are not understanding?

              You can secure your own accounts with any hardware wallet!

              • Zac Sand

                One of the cardinal points to Bitcoin is decentralization.

                Centralization, like banks and exchanges make a fat target, concentrating a lot of resources in one place.

                Same effort as hacking one wallet but millions of times the reward.

                It would take millions of time more effort to hack individual wallets for very little reward, comparatively.

                • Russell Spears

                  The first account to be hacked even if it only has $0.10 worth of bitcoin in it will be huge news and we will know everything about it and within a short time the community will fix the problem….

                  All banks do is cross subsidized the loss what Bitcoin will do is make it clear that it is antifragile

            • Russell Spears

              I don’t think anybody who understands this technology is recommending that people keep their Bitcoin on any Exchange…

              I’m not even sure what kind of Point you’re trying to make. Smh

        • Russell Spears

          Bitcoin has never been hacked!!!!!!!!!

          • Zac Sand

            Amen!
            Say it again brother…

            Bitcoin has never been hacked!

            How many banks and exchanges can say that…?

            • Russell Spears

              How many beans can claim that they haven’t been hacked and number of times every year?

  • Zac Sand

    Lol, they’re not just hiring trolls for the comments section anymore.
    We must be close.
    The banks are hiring entire news outlets to troll.

    HODL for the win.

    • Peter Edwards

      You guys sound like those investors who thought that silver was going to do a moon shot and lost out big time.

      • Zac Sand

        You sound like the buggy whip makers that tried to convince everyone automobiles were just a fad.

        “Listen to me, I know more about horses than any of you.
        You’re idiots. How’s it going to keep moving if there’s no horse.
        The first hill you come to it’s going to stop, then you’ll wish you were riding a horse!”

        • Peter Edwards

          Bubbles don’t imply a fad, they imply that people seem to get to excited about a story and many lose their shirts when reality sets in,

          • Zac Sand

            There is no “peak”.
            Bitcoin isn’t just a stock pick, among many similar, other choices.

            Bitcoin is a new technology replacing old, obsolete models of financial instruments.

            Due to the new fintech, there is no need to rely on the fiduciary responsibility of centralized institutions.

            Bitcoin and other cryptocurrencies represent a unique paradigm shift.

            With a near 100% record, financial intermediaries have proven that centralized “authority” cannot be trusted when money is concerned.

            Bitcoin allows people to disintermediate the corrupt traditional financial system.
            This represents a truly phenomenal improvement in financial technology.

            A good analogy is the example of the automobile replacing the horse as a means of transportation. The automobile did not “peak”, it simply replaced the obsolete model of transportation.

            There could be a “saturation point”, at which Bitcoin replaces the entire world financial system, but that’s at least 5 to 10 years out.

  • Mike McCormick

    Feel the burn , it has barely even started.
    This ain’t your moms beanie babies,
    This is not grandpas’ gold.
    As tech becomes becomes more accessible bitcoin continues to burn into orbit

    • Zac Sand

      To the Moooon baby!

  • Wom Tilson

    Cryptocurrencies seem a dead cert to succeed. Any given cryptocurrency, incumbents included, seems very likely to fail.