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The bitcoin craze is worse than the tech bubble

The near-vertical price rise of bitcoin, the digital currency, has been likened to the Nasdaq bubble. But there’s really no comparison.

The near-vertical price rise of bitcoin, the digital currency, has been likened to the Nasdaq bubble. But there's really no comparison, says John Authers in the FT. Since bitcoin started trading in 2010, its inflation-adjusted annual average return has been 411%; its best yearly performance, 2013, saw a real return of 5,426%. This is "nothing like what can be expected from a stockmarket". The best real annual performance by a stockmarket on record is Norway's 167% jump in 1979.

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As far as valuation goes, adds Stephen Gandel on Bloomberg Gadfly, consider that at the height of the dotcom insanity, the Nasdaq index had a trailing price-earnings ratio of 175. Bitcoin's earnings are the transaction fees it generates. Divide the total of these in the past year into the market cap, and you get a trailing p/e of more than 710.

As with all bubbles, "the underlying technological revolution is real", as The Wall Street Journal's Aaron Black points out. Bitcoins are based on blockchain, which could "change how commerce is conducted by cutting out the middleman". Blockchain is a digital, encrypted cloud-based ledger that records all transactions across a chain of computers an Excel spreadsheet that can only be modified with the agreement of others, essentially.

As all transactions are recorded and transparent, there is no need for an intermediate entity to verify them and deal on others' behalf. People could trade stocks with each other. Beyond finance, people will be able to rent car-rides and houses to each other without the likes of Airbnb and Uber.

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Still, bitcoin is hardly the only application of blockchain; there are more sophisticated versions. And there are certainly other digital (or "crypto") currencies out there too, adds Gandel more than 1,320, to be precise.

Bitcoin fans say they have scarcity on their side, because the company says it will only ever produce 21 million bitcoins. "But while the supply of bitcoins may be fixed, the supply of ways to invest in them (and other cryptocurrencies) is not." Futures contracts are on the way, and exchange-traded funds are sure to follow. As more and more people access the investment, the rarity value will recede. This mirrors what happened in the dotcom bubble. People could only invest in the advent of the internet through a handful of dotcoms at first. As more and more joined the party, the illusion of scarcity dissipated and the bubble burst.

For now, then, bitcoin is basically a stock that will only ever have 21 million shares and never pay a dividend, ETX Capital's Neil Wilson told The Guardian. Investors' only hope is selling it on to a greater fool the very essence of a massive bubble.

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