Bitcoin crash: Surely we should feel only virtual pain?

Business

Bitcoin crash: Surely we should feel only virtual pain?

The crypto-people baffle us on purpose, lest we work out the extent of hot air in their bubble

Mark Barnes


A bubble-bath in financial markets is a sequence of events, not a romantic invitation.
Bitcoin was invented nearly 10 years ago, by an unknown person known as Satoshi Nakamoto, as the new peer-to-peer currency of the world.
Perhaps it sought to replace gold as the non-fiat currency of choice and that’s why you should go mining for it? I truly don’t know. I’ve got matric and yet I still haven’t read an article on cryptocurrency without coming across words or acronyms I’ve never seen before and don’t understand. I think they (the crypto-people) do this on purpose, lest we work out the extent of hot air in their bubble. There are none so eager to nod their heads in agreement than those who truly do not understand.
The crash of the bitcoin bubble has been spectacular, losing about 80% of its value over the past year. That rivals the Nasdaq Composite index collapse at the time of the dotcom bubble burst in 2000 and beats hands-down the tulip mania in Holland (1630s), the South Sea Company (British) and Mississippi Company (France) bubbles in 1720 and other lesser bubble bursts in our history of stupidity.
Bitcoin was revolutionary, and that’s part of the problem. It was meant to operate below the radar of central bankers and market regulators. A counterculture currency for millennials that freely traversed sovereign borders and couldn’t easily be tracked or counted or taxed. No wonder it gained such enormous and immediate popularity — rising to 60 times its start-out value.
What has gone wrong? There are any number of design flaws and systemic characteristics that had to get in the way. A free-for-all, unregulated medium of exchange invites in all the baddies. Money launderers love it, exchange-control jurisdictions are nullified, terrorist organisations could execute illicit trades and settle freely.
These are exactly the issues that should and do attract the attention of regulators. Various attempts to bridge the divide between the virtual markets and formal markets have failed. A virtual currency trading on a virtual exchange like OKEx (Hong Kong)? I mean, get real?
Securities and Exchange Commission approval of a Bitcoin ETF (together with the futures market) is held out as the saviour of the bitcoin price. Supposedly it would allow speculators to get access without buying the assets, thus bringing more players into the market, but it has simply not materialised. The legal status of bitcoin varies from permissible to hostile across global jurisdictions.
One cause of bubble bursts is the absence of any agreed fundamental valuation basis for the asset. In the case of bitcoin, they (the geeks who make up this stuff) haven’t even agreed on a model, let alone begun to debate its inputs. So while it might end up with some level of acceptability as a medium of exchange, it’ll battle to be a reliable store of value.
Cryptocurrencies seem to be infinitely replicable – not only the supply of bitcoin (and its direct derivatives), but the emergence of its many digital cousins (ethereum, monero, dash, whatever. Think of a name, make it complicated, and you’ve got yourself a currency.) What self-respecting millennial would be caught dead without a neutrino wallet for storing bitcoin cash? Infinite supply squashes finite demand and drives the price of the object to zero, we all know that.
Volatility is another enemy of the retail investor-trader. Volatility results in an ever-widening bid-offer spread which makes it very expensive to get in and out of the market and can also force you to cut your position to avoid immediate mark-to-market losses you simply can’t afford to bear.
Some cryptocurrency supposed experts blame “hard forks” (blockchain jargon for radical technical changes) for the latest devaluation. I thought hard forks were utensils for impaling mielies to roast and eat off the cob, so I stopped reading that article.
The real reason for market bubbles remains the greater-fool theory – the misguided belief that no matter how irrational the reason for paying a price for an object way above intrinsic value is, you’ll always find someone dumber to sell it to for more. This iterative price-inflating behaviour happens in real time nowadays, so expect more bubbles, with bigger peaks and troughs, more often.
I’d better get out there now and buy some bitcoin at this bargain Black Friday hangover price. I hear it's going to $50,000, and I’d hate to be left out. I’ll get some for you if you like.

This article is reserved for Times Select subscribers.
A subscription gives you full digital access to all Times Select content.

Times Select

Already subscribed? Simply sign in below.

Questions or problems?
Email helpdesk@timeslive.co.za or call 0860 52 52 00.