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Thar be Bitcoin in Them Hills - On Bitcoin and Group Mentality

The California Gold Rush, which began in early 1848 in the Sacramento Valley was one of the defining events of early 19th century American history. When gold was discovered at Sutter’s Mill, it sparked of a massive migration into California, with thousands of people looking to strike it rich (Encyclopedia Britannica, 2018). While it is an imperfect analogy, in many ways, the meteoric rise of Bitcoin can resemble the California Gold Rush. Bitcoin has become the most recent fad, a currency which started off costing pennies, but with one Bitcoin now worth over $10,000. However, Bitcoin at its heart represents both clear and present risk for those who wish to invest now.

Bitcoins meteoric rise, but also its instability

But first a little introduction as to what Bitcoin actually is. Created by someone known as Satoshi Nakamoto, Bitcoin is a true digital currency, its worth not pegged to any existing currency, instead being capped at a set number of 21 million bitcoins, with around 16 million currently in circulation, with new Bitcoins being generated by “miners” allowing processing speed on their computers to be taken up to facilitate transactions in order to gain fragments of Bitcoins(Hern, 2018). This gives it scarcity and therefore value, and beyond the realm of speculative investments, Bitcoin is used to pay for goods and services with certain backers for a variety of services and goods both legal and illegal (Grinberg, 2012).

The problem with bitcoin however comes when it become mainstream. Before these past few months, bitcoin had been gaining value slowly, but when the news broke that the value of the bitcoin had increased so much, and that the value was continuing to rise, it captured the imagination of everyone who was desperate to get rich quick. There ends up being a problem however, succinctly described by Joseph Borg, a securities regulator in an interview with The Atlantic. He says that “This is just like the dot-come bubble, tulips in the 1600s, and oil and gas speculation. Things get to be a mania. The retail market gets hit with advertisements and media pitches: You’re going to miss out on the next Microsoft!...”(Lowrey, 2018). This is a prescient warning, and one that isn’t being heeded as Bitcoin hype reaches new heights.

The reason I can be so pessimistic, despite being a mere undergraduate is that Bitcoin perhaps represents the most obvious bubble in economic history. It exists at the moment almost entirely without regulation, bar some token efforts in New York to introduce a license for businesses using it (Casey, 2018). This can only go on for so long, especially given the ability of Bitcoin to be used for illegal purchases as well. When it does, the bubble will almost certainly burst, as the flexibility of the currency hits regulatory walls, and amateur investors sell in a hurry. And in the end, the only losers will be those that hoped to find gold at the bottom of a river.

William Hereward

#Bitcoin #bubbles #priceregulation #SatoshiNakamoto #economics #cyptocurrency #Digital

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