Getting Cryptic: Is the Bitcoin Bubble about to Burst?
It is a fundamental fact of any market that the value of anything is equal to what a buyer is willing to pay for it. Throughout history, occasions have emerged that could be described as market “bubbles”: environments where, for various reasons, buyers were willing to pay high and increasing prices for something. One historical example is the Tulip Craze (Dutch: Tulipmanie—“Tulip Mania”) of the 1630s in the Netherlands. When tulips were first introduced to the Dutch from Turkey, the novelty of the beautiful blooms made them very popular. Before long, that popularity fed into market conditions that lost all mooring in reality. At the peak of the Dutch “tulip fever,” it was said that a single extremely rare bulb could command the price of an entire estate.
But as the word “bubble” implies, such manic market conditions rarely last. When the tulip bubble popped, some of those same bulbs that previously commanded unimaginable amounts became available for the price of a common onion. A similar phenomenon occurred in the opening years of this century with the so-called “DotCom Crash,” when the values of internet-related companies (“dotcoms”) plunged, after being inflated far beyond what their actual business operations could justify.
There are signs that something similar may be happening currently in the value of cryptocurrencies: Bitcoin Ethereum, Ripple, Litecoin, Monero, and others. Many of us had never really heard of Bitcoin and other cryptocurrencies until the latter part of 2017 when, for the first time, the value of a single Bitcoin reached its all-time peak of just under $20,000. But from then until now, Bitcoin, the first and best-known cryptocurrency, has dropped in value to just over $6,300 as of mid-August. For Bitcoin, which has the largest market valuation of any of the cryptocurrencies (just over $112 billion at this writing, according to CoinDesk.com), that represents a loss of more than 70 percent of its worth, representing some $200 billion of vanished value for holders of Bitcoin.
It may be helpful to provide a quick recap of the origins and basics of Bitcoin and other cryptocurrencies. Bitcoin was invented in 2009 by a person or persons using the pseudonym Satoshi Nakamoto (we still don’t know his/their real identity). Cryptocurrency functions as a “virtual currency,” dependent for its existence on blockchain technology, a complex series of algorithms that provide the transactional validity of each unit of the currency. Blockchain technology prevents any Bitcoin or other unit of cryptocurrency from being spent more than once. Cryptocurrency is “mined” by powerful computers—often operated by syndicates of users—that solve the algorithms upon which the currencies depend.
As interest and knowledge of cryptocurrency has grown, it has made inroads into mainstream commerce. It is now possible, using online sites like Gyft and eGifter, to use Bitcoin to purchase a gift card for retailers like BestBuy, Target—or even Dunkin Donuts. You’ll need a virtual wallet, of course, and the extreme volatility in the value of cryptocurrency, mentioned above, is also a potential challenge. Even merchants who readily accept Bitcoin may impose a 10-minute window on the completion of your purchase, since your Bitcoin may be worth less when you finish your transaction than it was when you started.
One reason for that volatility is that at present cryptocurrency is almost completely unregulated. Of course, that was the whole point for developers like Satoshi Nakamoto and others: to create a medium of exchange completely independent of government regulators, central banks, or other authorities. Such absence of official control has obvious implications for the potential of cryptocurrency for misuse by criminal and other nefarious elements, and this aspect was the topic of last year’s remarks by US Treasury Secretary Steve Mnuchin. Other governments are also studying the potential dangers of cryptocurrency, including South Korea, which recently passed regulations requiring cryptocurrency traders to reveal their true identities, along with other measures designed to increase regulatory oversight. Another vulnerability of cryptocurrency is its susceptibility to abuse by hackers, as exemplified by the December 2017 cyberattack on a South Korean cybercurrency exchange that resulted in the theft of some $35 million in digital currency.
Another important thing to remember is that blockchain technology is still in a development phase. It is difficult to predict how the cryptocurrency environment will develop over the long term. Remember VHS and Betamax—or, for that matter, eight-track tapes? Until the technology matures a bit more, it is very vulnerable to the type of developments that can cause one approach to succeed and another to fail. Indeed, the site DeadCoins.com lists some 1,000 cryptocurrencies that are presently considered defunct, illegal, or otherwise non-operational.
Despite these concerns, many knowledgeable persons insist that cryptocurrencies are the way of the future. Predictions of the future value of cryptocurrency have ranged as high as $1 million for each Bitcoin. And yet, the drastic fall in value that we have seen since the December 2017 high should certainly give pause to traders and investors aiming to become overnight cyber-millionaires. The frantic inrush of funds to this unregulated market, dependent for its very existence on a technology that is still very much in flux, has many of the hallmarks of a classic market bubble that, when it pops (as it may be in the process of doing), will transport many millions of investor dollars into oblivion. In an interview with Newsweek on August 15, Niels Pederson, a senior lecturer in financial technology at Manchester (UK) Metropolitan University, suggested that it is “anyone’s guess” how low the price of cryptocurrency could go. “Even if you believe in cryptocurrency,” Pederson said, “picking the long-term winner is like looking for a needle in a haystack.”