By Dhirendra Kumar
Bitcoin is a bubble because it has no inherent value, and the price is determined solely by the balance between buying and selling. This statement is indisputable. The only problem is that one could, quite reasonably, also say this: Gold is a bubble because it has no inherent value, and the price is determined solely by the balance between buying and selling.
I mean, you may dispute that gold is a bubble, but you cannot dispute that it has no inherent use and unlike a business or a piece of land, it is not a productive asset. If people stopped buying gold, its value would collapse. If its value started collapsing, more and more people would try to sell it, and be willing to accept lower and lower prices. That’s just the basics of price determination in a free market.
A lot of people, especially those who think that bitcoin is immune to the basic laws of human behaviour just because it’s ‘tech’, don’t seem to appreciate this. The implementation of bitcoin, the revolutionary blockchain technology, the thrilling tale of a mystery creator whom no one knows (and who may never have existed), all that is great stuff and fits right into today’s world. In fact, there seems to be a belief that Satoshi Nakamoto was a time-traveller and bitcoin is a technology transfer from our own future selves, but let’s not try to work out the details of that.
Even so, the price of bitcoin is a different matter. The rise of bitcoin’s price is a perfect demonstration of how price gets determined in an open market, just as its collapse will be. The price rise indicates that compared to people willing to buy it, there are practically no sellers of bitcoin in the world today. The supply of bitcoin is also constrained by the mining process. A lot of people have taken to heart the fact that there is an inherent limit to the number of bitcoin that can be created, thus giving it a sort of a built-in, mathematically enforced ‘monetary policy’.
And yet, the fact remains that the relentless price rise of bitcoins is untested in the kind of markets that other financial assets face. For example, there is no real way of shorting bitcoin today. The derivatives available as of now are on unregulated markets and not trustable. There are probably millions of people in the world who think bitcoin is going to crash soon but they have no way to trade on that opinion. This could change soon as a number of trustworthy exchanges are working to create bitcoin derivatives, Nasdaq being just one of them. That could well be an inflexion point in this bubble.
Anyhow, the bottomline for the individual saver and investor is that this is gambling territory. That’s not just because of the bubble, but also the mechanics of bitcoin. Even if you understand and appreciate that it’s a gamble and want to try it, the mechanics are a problem. All sorts of charlatans have popped up over the last few months. There are apps and websites where you can ‘buy’ bitcoin but they also claim to store it for you. Many of these offer no provenance of any underlying transaction or ownership. That is truly ironic (and horrifying, in a way) because the whole point of bitcoin’s existence is that it offers an ironclad, independently verifiable proof of ownership.
In a financial system where people have created investment manias and Ponzi schemes out of trees, college degrees, flowers and even birds (remember the emus), what are the odds that an actual stateless currency has avoided the attention of scamsters?
The author is the Founder and CEO of Value Research.
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of http://www.economictimes.com.