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Bitcoin - Another Tulip Mania?

Sep 2, 2017

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POITOU, FRANCE - The price of bitcoin has topped $4,800.

What this means, we don't know.

'It's like the tulip mania...just a bubble,' said a friend last night.

'Well...yes and no,' we cautioned against a rush to judgment.

'It may be a bubble...but it is not just a bubble.'

Father Knows Best

In June, one of our sons urged the family to put some money into bitcoin and at least one other cryptocurrency.

We tried to dissuade him, warning the young folks that it was 'pure gambling'...and 'rank speculation'.

We made it clear that Father Knows Best - bitcoin is no place for your savings.

We were fairly confident it would blow up in their faces...but we went along, judging the inevitable loss as a smallish price to pay for moral instruction.

So far, though, they have learned the wrong lesson.

'Our investment has doubled,' was the report this morning.

'Uh, it's not an investment,' we replied.

'Okay, but it's the best speculation we ever made.'

Bitcoin was the subject of conversation last night: How does it work? How high will it go? Is it just used by money launderers and drug dealers?

Another of our boys, Henry, was on hand to reply.

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Crypto Bubble

'There are now more than 1,000 cryptocurrencies,' he led off.

All sorts of new ones have come on the market...each with its own particularity.

There's Monero (fully anonymous), Dash (instant payments), Ripple (interbank settlements), Litecoin (day-to-day transactions), Ethereum (fully programmable)...

One - PutinCoin - is named after a national leader. Some of these currencies are backed by gold. Others include benefits, such as the WhopperCoin in Russia. It gives Burger King customers credits that can be used at the fast-food chain.

And last week, Estonia announced that it would consider launching an official, government-backed cryptocurrency, the 'Estcoin'.

'It is a bubble,' Henry continued, 'in the sense that a lot of people are expecting things that will never happen.

'For example, take the blockchain, the technology underpinning all cryptocurrencies. It is not likely to create a whole new form of 'smart contracts' - contracts executed by computer code - as some people think.

'The blockchain works for currency transactions, but it probably won't work especially well for automatically resolving insurance contracts or property titles.

'People extrapolate wildly. It was like in the last century, when automobiles were invented. People thought we'd soon have flying cars. But it's 100 years later, and we still don't. Because the technology only allows cars to roll, not to fly.

'And there was the dot-com bubble...when people thought that having information readily available would revolutionise the world.

'They thought that people in some remote African village would tap into the internet and build their own 3D printers. Instead, they just play games.

'That's another thing that will never pan out - 3D printers. They're gadgets...not things that will revolutionise production.

'And remember the craze about nanotechnology? Apparently, some Japanese research firm had built a miniature machine...as small as a grain of rice. And they were going to be able to recreate the whole world, one molecule at a time. What happened to that?

'You might say the same thing of artificial intelligence. People have been talking about it for years. But nothing ever comes of it. Real intelligence is hard enough to come by. Artificial intelligence - we don't even know what it is.

Digital Cash

'So, there are going to be some big disappointments and some big losses in cryptocurrencies, too. And maybe the whole thing will blow up.

'But from what we've seen so far, the blockchain does work...for money. And money is valuable.

'Not because it is backed by the government. Or backed by gold. Or backed by a bank. It is valuable because it works...as digital cash. Tulip bulbs never did. That's why this is new. And exciting. And nobody knows where it will end up.'

Henry recently interviewed one of France's experts on cryptocurrencies, Philippe Herlin. Asked where the price of bitcoin could go, Herlin replied:

  • What price will it eventually hit? Some say about €100,000 ($120,000). That would be a market worth just $2.5 trillion. Not much compared with other asset markets.

    It's just equal to the total assets of French bank BNP Paribas...or the French national debt. So, €100,000 is an attainable figure. Bitcoin is an asset that gains value over time. Even at €100,000, there is still potential for growth. This prediction is not unrealistic.

'The most interesting thing,' continued our son, 'is that nothing...not dot-coms...not gold...not even tulip bulbs...has ever made so much money.

'And nothing like this has ever happened before. Satoshi, the guy who is supposed to have invented bitcoin, has some $2 billion worth of the coins. They were worth nothing eight years ago. He's never touched them. Why not?

'You'd think he'd want to take some of his money off the table. Maybe he's dead. Or maybe he's lost the password to his bitcoin 'wallet'.

'That's one of the new things about bitcoin. They come out of nowhere. But they can go back to nowhere too.'

Regards,
BILL BONNER Founder, Agora Inc
Bill


Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Bitcoin - Another Tulip Mania?"

Dilip

Sep 2, 2017

Why are governments not taking steps to put in regulations to prevent massive potential losses for ordinary citizens ( who have become gamblers)? Bitcoin that was worth less than a cent is now worth 4800 USD is crazy and totally off charts - like boom and suddenly you are in Jupiter. Man has not made this amount of money ever in any casino dating back centuries

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