For a start here is a quick reminder of a few extraordinary financial bubbles from history:
February 3, 1637 – In the Netherlands a single tulip bulb sold for 5,200 guilders which that time would have been ‘sufficient to purchase one of the grandest homes on the most fashionable canal in Amsterdam for cash, complete with a coach house and an 80-ft (25-m) garden – at a time when homes in that city were as expensive as property anywhere in the world.’ Take a look at this chart:
October 22, 1999 – Revenue-less networking company Sycamore Networks IPO’d with a market cap of over $14 billion on the NASDAQ. That’s $21 billion in today’s money. Here is the NASDAQ chart:
January 17, 1980 – Silver hits intraday high of US$50 an ounce. In today’s price that’s US$150. Today, 38 years later, an ounce of silver is worth about US$17. This chart tells the whole story:
Now take a look at the Bitcoin chart of today:
I hope you did not miss the striking similarity of this chart to the silver chart of the 1970s (up to January 1, 1980) above. We might get to the January 17, 1980 date equivalent any day now. I want you to avoid that sinking feeling when the price starts to drop like a stone if you bought into this bubble recently. However, if you haven’t bought any bitcoins this year there is nothing much to lose. You might as well ride it out. Here is a bit of background in case you’re new to Bitcoin and looking for a bit more informed decision:
The idea behind Bitcoin is brilliant and relatively simple. Encryption is a key part of it to keep the hackers and cheaters at bay. Blocks of encrypted transactions are chained together creating Bitcoin’s “Blockchain”. All bitcoin transactions are recorded and stored safely encrypted on millions of computers worldwide. The sheer amount of replicated identical copies created on electronic devices during the transaction validation process makes it virtually impossible for hackers to alter them.
Why the owners of these computers or devices are so readily willing to provide storage space, processing power and consume a lot of electricity to validate all this data? Because they get a fair chance to earn reward bitcoins through the so called “Bitcoin mining process”. For this reward at today’s Bitcoin price millions think that it’s worth to throw the resources behind this process.
Bitcoin is divisible. The smallest amount one can transfer is 0.00000001 bitcoin in a transaction. The more popular and expensive Bitcoin gets the less quantity will be used for a transaction and the more transactions need to be validated.
In my opinion Bitcoin’s downfall will probably be caused by its resource consuming and inefficient transaction validating process. At some point many governments in the world would be unable or unwilling to allow companies or individuals to provide the processing power and electricity needed to validate every bitcoin transaction.
The Chinese government already shut down all Bitcoin exchanges in China. I suspect the main reason was to prevent their own citizens to launder money and transfer large sums of wealth out of their country. Western governments might follow suit, but would give a different reason: climate change. They wouldn’t want so much resource wasted on validating Bitcoin transactions.
I do not know when this downfall will happen. The total value of all Bitcoins would be US$20 trillion, roughly the same as the total US national debt today, if the value of a bitcoin reaches a million US$s. This could happen before the bitcoin bubble bursts, but I doubt it.
The credit for this article goes to my other half. You can read about how his IT skills saved our lives in my double memoir disguised as fiction, written by my murdered sister and me, The Sex Tourist.