Bitcoin shares many characteristics with the famous bubbles of the past. Like the tulips that were the basis for the “tulip mania” bubble in Holland in the 17th century, the cryptocurrency is rarely used for any practical purpose. How many people or companies use it for purchases? Very, very few.
It’s a pretty good bet that the vast majority of people reading this column don’t actually use the cryptocurrency and don’t know anyone who has.
The bulls will, however, swear up and down that it will become the currency of the future. But how do we know that will be the case? How do we know that not this, but some other cryptocurrency, endorsed by the world’s central banks and large investment banks will fulfill that role?
The Reserve Bank of New Zealand’s acting governor, Grant Spencer , recently endorsed that point of view when he said, “I think (cryptocurrencies) are part of the future, but not the sort that we see in bitcoin.”
Flawed Assumption on Bitcoin
In assuming that this will be the cryptocurrency of the future, bitcoin bulls are making a flawed assumption, following in the footsteps of illogical reasoning that formed the basis of past bubbles.
For example, during the dot com boom investors assumed that every Internet stock would become successful and extremely valuable, regardless of their financial results. And during the housing boom, investors, banks, and homeowners assumed that housing values would continue to rise quickly forever.
Also like past booms, the valuation of the cryptocurrency has surpassed all logical levels. What exactly is the rationale for each being worth $18,000? Would it take a senior software engineer in India, whose average annual salary is around 727,300 rupees or about $11300 annually, 18 months to mine a single bitcoin?
How many individuals or even companies would be willing to actually take out a credit card and spend $17,000 to buy a single one of these cryptocurrencies, not as a short-term investment but as a long-term value storage or currency tool? Probably not many if any.
So it seems that, as in all the past bubbles I’ve mentioned, this cryptocurrency is being bid up not based on any logical belief or intrinsic value, but only because everyone thinks it will keep going up, which is the top ingredient for a bubble.
Aside from its bubbleicious characteristics, the cryptocurrency has other big problems. Large private banks and multiple central banks are opposed to it. Given the tremendous influence that both institutions have on governments, there is a pretty high risk that the cryptocurrency could be made illegal by multiple governments in the future.
Finally, in light of its security problems, governments would probably be justified in banning the cryptocurrency. In 2014, Bitcoin exchange Mt Gox lost $487 million and earlier this month nearly $64 million of bitcoin was stolen by hackers. Nor are these totally isolated incidents.
It is hard to think of a single incident of tens of millions of dollars of any conventional currency being stolen by an outside individual, let alone multiple such incidents (Ponzi schemes aren’t in the same category because in those cases the victims, although they have been deceived, are willingly handing over their money).
When it comes to security, bitcoin just isn’t ready for the big time.
In summary,the cryptocurrency has all the warning signs of a bubble, including irrational exuberance, lack of practicality and a basic flawed assumption. Meanwhile, the cryptocurrency’s security problems and the antipathy that central banks and large private banks have for it does not bode well for its future.
Investors should sell their bitcoins immediately before the bubble bursts.
As of this writing, Larry Ramer did not have any of the aforementioned securities.