One thing that we can be sure of is that nothing is too big to fail. During the past century, humanity has witnessed some of the biggest financial crashes and manias ever recorded. One of the greatest lessons we can draw from history is that things usually get too big before they blow up. As it happened back in the 17th century, with the Tulip Bulb’s frenzy, the dot-com stocks boom in the 90’s or stock market crash of 1929. But, will it be the case of Bitcoin? Are we headed for a Bitcoin crash? It’s imperative to look at the past to see how the future will unfold.
Bitcoin was created in 2009 after the aftermath of the 2008 financial crisis. A technological marvel aimed to avoid the whole banking establishment. A disruptive way to challenge fiat currencies and government’s regulation, centralization and control. But essentially, its creation is fundamentally flawed, with an artificially imposed cap, the supply of Bitcoins is permanently fixed at 21 million which itself is a design devoid of economic sense. An economy needs as much money as transactions and activities occur within it. So if a lot of people want to start paying over the Bitcoin network, the value of Bitcoins will need to rise or at best stay at high levels to accommodate such demand.
If Bitcoins transactions continue to increase but the amount of currency ceases to do so because it has a ceiling, then it will suffer deflationary bias. That is, each Bitcoin will be revalued too much and the prices of the goods nominated in that currency will then fall, which is not at all positive for economic activity.
All money needs to do is provide a stable index of value for any and all goods available on the market. Currencies such as the US dollar are incredibly good at this, they also act as legal tender back up by central banks and treasuries. Bitcoin is completely incapable of competing with well-established fiat currencies mainly because its owners prefer to hoard rather than spend, and this is the primary reason why in the last couple of months its value has soared up almost endlessly. Unfortunately, until goods start to get valued in Bitcoin directly rather than in other currencies then it will never be able to become a currency. And even if its adoption was needed Bitcoin’s path to mainstream usage faces many legal, regulatory, and cultural hurdles.
Contrary to what a lot of people think (including financial experts and traders) Bitcoin is not a currency but rather something closer to a commodity. A digital one. Think of it like the digital version of gold without the intrinsic use of the latter. Bitcoin has all the characteristics to be a commodity because it’s scarce, portable, secure and durable but with serious problems.
It is worth noting that the reason people use Bitcoin at the moment is because it seems useful and robust, but they are also over-hyped, madly driven by the cryptophenomenon sometimes without even understanding it to its utmost. The value of Bitcoin is mainly driven by speculators followed by a euphoric momentum brought up by its investors. Big players have got involved in the craze and are actively manipulating the markets through high investment and high sell-off. The inflationary spiral is notorious and it could bring Bitcoin to its end.
“Bitcoins are not a real investment; they are bets inside a casino. If the price goes back up, don’t be fooled. In thrune parlance of popping investment bubbles, it’s something called a ‘dead-cat bounce.’ People who are desperate to keep the game going rush back in, hoping to bring the price back up, but it never lasts”. — Kurt Eichenwald
However, there are many reasons that suggest that this financial experiment will not have a long run, and that we are in fact in front of another speculative bubble according to a recent report by the WSJ, where 96% of economists surveyed supported the idea.
As Hyman Minsky has stated before “anyone can create money: the problem is in getting it accepted”. And when it comes to a new currency, the degree of acceptability in question depends on the ability of the issuer to ensure its adaptability by a wider audience. That is, the more the issuer has the power to make its currency used, the greater robustness it will have. That’s why the strongest and most used currency is issued by the world’s most powerful state (military, economic, technological and cultural terms) that is able to impose by force its use: The US Dollar.
The Bitcoin boom epitomizes a fundamental phenomenon we’ve been experiencing in the last couple of years. Our lack of adaptability to new technological inventions. Cultural angst is not allowing us to benefit entirely from all the technological innovation coming along every day. As Eric Teller, Google’s X research and development CEO has said “technology is increasing at an ever- faster rate while human adaptability rises only at a slower, linear rate”. Bitcoin enthusiasts and investors are aware of this phenomenon and they use it against the vast majority of us. That’s why cryptocurrencies are so complicated to understand for some and the primary reason why such technology is maybe too advanced for our time.
Historically, bubbles are quite hard to predict, yet it’s safe to state that Bitcoin has all the telltale sign of a playbook bubble. First, its recent astronomical gains and slumps from last year where its value slumped to below $11,500 at one point last December losing more than a quarter of its value in just a day, at the same time its price soared by a record of 1,500% in 2017. All these signs aren’t new and have previously been registered in bubble-like events before.
“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception”. — George Soros
Speculative bubbles like Bitcoin are usually followed by: “lots of excitement” and “high amount of volatility”. The perfect combination of an imminent economic catastrophe. The market can’t always produce optimal results and gains for everyone unlimitedly, that’s not what capitalism is all about.
At some point, the craze will stall out, and as we’ve seen in the past panic will set in. Only those seeking speculative gains will try to cash out and reap their profits, the ones who thought they were on their way to easily become millionaires will, unfortunately, be the ones who will suffer the terrible consequences of the burst.
“Quick and easy wealth often ends in quick and easy despair”. — Jeffrey D. Sachs
Sorry, but Bitcoin has all the hallmarks identified as a bubble. It’s unstable, irrational, speculative, volatile, complicated and way too euphoric right now. We are just in front of another frothy bubble that will spectacularly and inevitably crash someday in the near future, we just have to wait for it.