The Bitcoin Bubble?

“Beware buyers”, warns US regulators of bitcoin’s dangers, that surged by over 1700% this year. Bitcoin is like the musical chair game. Everybody knows that music will stop and there will be people left out with no chair to sit on. Still the game is a thrill!

Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency, as the system works without a central bank or single administrator (Wikipedia). Many of us might have heard about Bitcoins after it was acquainted with most notorious nature. For an ordinary person, who does not understand what Blockchain Technology is or how it works, it is the magical elixir to multiply ones money manifolds. In 2010, ‘SmokeTooMuch’ unsuccessfully tried to auction 10000 BTC for $50. And today one might be shelling out millions of dollars for the same. As a fact, had one waited for 7 years, he would have been richer than Bill Gates now. However, this was not as simple as the mainstream media would make you believe. Before several billionaire investors have shown interest in bitcoins and exchange rates took a steep curve, many claimed this to be Ponzi scheme and biggest financial bubble.

Bitcoins has sustained for nearly ten years now with considerable acceptance. The uniqueness about bitcoins is, them being decentralized and borderless and the reason behind its popularity is the lack of intrinsic value unlike rupees or gold and is incorporeal.

There may also be a chance that not just the bitcoin but also the overall concept of cryptocurrency itself picks-up. It might have short dips as long as it is unregulated. Nevertheless, once the crowd realizes its true merit, it may grow more than the current value, maybe not in terms of the price but in terms of the value, it creates. Like internet, which had no major applications in the beginning that public could use but once it found LIVE use cases it didn’t turn around. No one can stop internet, not even the so-called dotcom! Cryptocurrency might have the similar fate with enhanced adoption in the form of payments and other transactions. The US securities and commodities department announced to launch oilcoin (a type of cryptocurrency), backed by physical assets, based on oil reserves. This would however comply with the US laws and will address criticisms raised against cryptocurrencies.

The main risk of bitcoin comes from factors like, security breaches that might affect the credibility of the protocol and its usefulness as a method of payment.

To the contrary, bitcoin has all the signs of a bubble - size, volatility and speculations without risk analysis and trading in futures. This can be mapped to a similar situation in the 1630s when the tulip bulbs began to be traded in the future market and finally the bubble crashed and finally bursted.

 Mr. Jordan Belfort says, “The next stage, you will see it really skyrocket, there will be a short squeeze, it will go even higher and then eventually it will come caving in, it’s almost a guarantee”[5]. In fact, Bitcoin process has already crashed over 140 times in its lifetime.

The monkey-business analogy perfectly explains the current situation. One-day a merchant came to a village to buy monkeys. Puzzled with his craziness, villagers caught a few monkeys and gave it to him for $100 each. Then merchant announced that he is travelling abroad and would buy monkeys for $500 later. Meanwhile his servant would care of monkeys. With no monkeys left, villagers felt wretched and decided to buy monkeys from the servant for $300 and waited for merchant to return. But nobody returned! The Bitcoin might be the next monkey business that will render many bankrupt and a few people filthy rich.

Going down the history, we learn that financial crisis has occurred once in every decade. For example, the great recession(1970), the global crisis of imploding loans to under-developed nations(1980s), failure of as many as 2808 US financial institutions(1982–1992), financial crises(1990s), the US dot com bubble and finally the 2008 housing bubble. Hence, on the historical average 2018 is looking very dangerous which might be the bitcoin bubble.

Allegedly, the Bitcoin ownership is concentrated into the few hands. Over 97% of bitcoin addresses hold less than 0.001 bitcoins while merely 0.3% have over one bitcoin [4]. The Bulgarian government is sitting on 213000 bitcoins that it seized in raids earlier this year. With a fortune of $3Bn+, it is mulling over the idea to liquidate or hold the coins. Similarly, many undeclared bitcoins with other governments is waiting to come into the market. Now one can ween the bitcoin prices if this 0.3% of bitcoin traders decide to sell off their bitcoins to be real millionaires. This would disrupt the demand-supply equation and would see bitcoin prices rallying down.

Bitcoin and other cryptocurrencies have promised a revolution at the cost of serious environmental challenges. Each bitcoin transaction requires ludicrously large computational effort and electricity usage is appalling. Over the years, this has caused the total energy consumption of the Bitcoin network to grow tremendously. According to IEA, every transaction consumes 240 kWh energy, which is enough to power an average American home for eight days. Moreover, at current rate the Bitcoin network is estimated to consume more power than Serbia and is responsible for almost 16,000 kilotons of CO2 emissions annually. If mere Digital Book-keeping causing an entire decent-sized country's worth of power usage, and belching kilotons of greenhouse gases into the atmosphere, one has got to start wondering before it starts becoming a net negative to humanity.

To conclude, we are still in an early stage of understanding how this concept of decentralized commodity for value exchange spans out to be. Unless it gets a legal status, across the globe it would not hold the true value. To the contrary, betting against bubbles is an amateur play. If one can acquaint oneself with risks involved and is keen on exploring what might be the revamp model of futuristic transactions; this might be the best time to buy some bitcoins.

Nevertheless the saying goes, “Bubbles make castles. Bubbles burst eventually, but the castle stay”!

(This piece was a final round entry for 'ThinkPiece', a National level Quiz & Article writing competition organized by IIM Trichy)