Is Bitcoin going to crash?

According to the billionaire Carl Icahn, the answer is yes. He told CNBC this week that it is similar to swampland next to the Mississippi river.  He’s talking there about a bubble that nearly bankrupted France, back in the early 1700s.  A Scottish adventurer, John Law, was granted the right to sell shares in a company which essentially oversaw the French Government’s claim on land in what is now the United States of America.  It wasn’t the best land in the North America – in fact, far from it. 

But to the investors who piled in to what was akin to the ICO of the age, it was enchanting.  Untold riches would be generated by these investments in far flung lands. The word “millionaire” was invented for those who had bought stock in the Mississippi company, which rose by almost two-thousand percent in a year. Investors ranged from the wealthiest members of the nobility to peasants, who pooled their funds to buy a single share.  Unfortunately for many of the new millionaires, word eventually got around the the land was more or less useless. Such was the financial destruction, France ended up having to abandon paper money for almost a century. Bitcoin’s gains are even more astonishing. As recently as 2011, a single Bitcoin could be bought for as little as a dollar.  At the time of writing, they’re trading at more than twelve thousand dollars.

Is there a Bitcoin bubble?

The most dangerous statement in the history of bubbles is that this time, it’s different. But there are key differences, and even if bitcoin were a bubble, there is also money being made on the way up. The question then becomes at what point do you cash out. The differences are these. 

Bitcoin has no less intrinsic worth than any other global currency. Arguably, it has more intrinsic value, if you see its global, borderless, non-political, non-Governmental status as an advantage. It is the best known of all the crypto currencies, and that would still be true in a post crash world. 

And real work goes into Bitcoin mining – the mathematical calculations needed to create a new bitcoin require enormous computing power, limiting new supplies to around half a million extra coins per year. There are just shy of 17 million bitcoins in existence right now – and there can only ever be 21 million. The rise in value reflects the fact that the world is only just waking up to the existence of Bitcoin.

Greater Fool Theory

It is also true that many of those buying bitcoin are fools. And there is “Greater Fool Theory”

in any bubble, the price will continue to rise if the fools believe greater fools will be prepared to pay even more.

But as John Maynard Keynes identified, markets can remain irrational longer than you can remain solvent. In the meantime, sophisticated investors will find ways to buy bitcoin with money they can afford to lose. And if profits are made on the way, making regular decisions to cash some of them out after will give sophisticated investors a war-chest for a the day of any crash. That day might well set to identify a more stable price and therefore a more useful Bitcoin.

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