Two decades ago, I was earning a living as an internet commerce expert, and telling anyone who would listen that, while the internet itself was important, internet stocks were a bubble that would end in tears.
We are in a similar position today. Now the technology that matters is blockchain.
Blockchain automates trust, and movements of value, the way the internet automated communication. Blockchain can eliminate friction in finance of all kinds.
Over the next decade blockchain will completely transform how value is transferred between people and countries.
Blockchain is a very big deal.
But there is a bubble inside blockchain. That bubble is called bitcoin.
Bubble, Bubble, Toil and Trouble
Bitcoin is the product of Russian programmers and Chinese miners. It is sucking up money because of its perceived scarcity. Where real cash is scarce, as in Zimbabwe, bitcoin is incredibly dear. Even in the U.S., a bitcoin was trading at over $6,000 as of this writing.
But bitcoin is not a currency. It is very illiquid, because the blockchain controlling it is slow, and there are only 16,635,150 in circulation. Simply by refusing to sell, bitcoin owners become millionaires as otherwise-rational people are stampeding into the market.
During its recent run-up, bitcoin has come to represent over 56% of the cryptocurrency market, up from less than half just a month ago.
Three primary sources of bitcoin news are bitcoin.com, a collection of young bitcoin evangelists; Coindesk, controlled by the Digital Currency Group, which I wrote about last week; and Cryptocoinnews, owned by a 27-year old Norwegian, Jonas Borchgrevink, who also owns Hacked.com.
Thus, the media covering this market has an interest in keeping the market bubbling. Anyone who questions the market, even JPMorgan Chase & Co. (NYSE:JPM) CEO Jamie Dimon, is quickly damned as an old fogey who doesn’t get it.
I was considered an old fogey who didn’t get it during the dot-com bubble. I got it only too well.
Down the Rabbit Hole
Bitcoin is a highly illiquid index of fear and distrust of institutions, masquerading as an alternative form of currency.
The bitcoin market is intimately connected with the Dark Web, which is why authorities in the U.S., China, and even Russia are trying to control it.
Trader Josh Brown recently tried to go down this rabbit hole and if you read his piece you’ll see the truth of what is happening. All the talk is of big institutions buying into the “market” for an asset that is deliberately illiquid.
I say it’s deliberately illiquid because everyone trading bitcoin knows that the blockchain controlling it is inadequate to the task of managing a fast-growing market. Yet the technical solution, a fork called SegWit2, looks unlikely to come off because traders who depend on the illiquidity to keep the value of their holdings high have rejected it.
The Bottom Line on Bitcoin
So, on the one hand, we’re to believe the word of a bunch of 20-somethings that Goldman Sachs Group Inc. (NYSE:GS) and college endowments are all ready to plunge into this market, whose ceiling is unlimited.
On the other hand, the blockchain running bitcoin can’t handle this trading volume, but a fork to a better blockchain is impossible because those who own bitcoin don’t want to risk it.
When I was covering the dot-com bubble, the people running the bitcoin bubble were in elementary school. They have never seen what happens when a marketplace fueled by hype crashes and takes the rest of the market with it.
I have. It’s the benefit of having had many birthdays. You pick up clues when you see patterns repeat.
I’m old enough to know a bubble when I see it.
Dana Blankenhorn is a financial and technology journalist. He is the author of a mystery novella involving bitcoin, The Reluctant Detective Saves the World, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. To follow the value of crypto currencies bookmark https://coinmarketcap.com.