Why Bitcoin is acting like a bubble

Tim Worstall, from the Adam Smith Institute in London, writes on Forbes.com that Bitcoin is showing signs of bubble behavior.

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Why Bitcoin is acting like a bubble

Tim Worstall, from the Adam Smith Institute in London, writes on Forbes.com that Bitcoin is showing signs of bubble behavior.

While fluctuating prices — especially those as wild as Bitcoin’s have been in November — do prove bubbledom, this does not mean that a burst is looming, he says.

To illustrate, Bitcoin’s activity on Mt. Gox on November 18, the day of a US Senate hearing on the currency looked like this:

“Bitcoin’s value hit $900 … 5 p.m. PST Monday, up more than 70 percent from Sunday’s close and setting an all-time high in the process. But, it also just dropped to $650 within the past 30 minutes,” wrote Geekwire’s Taylor Soper in real time.

Still, Bitcoin’s success or failure is still totally in the air, Worstall writes. In fact, Bitcoin the platform could carry on long after Bitcoin the currency devalues all the way to zero.

He cited Global Crossing, the telecoms company that rode the first dot-com bubble into bankruptcy, as an example. Someone had to navigate the minefield and set off all the explosives, to use a tortured metaphor. Bitcoin may simply be the one to trigger the mines, allowing others to pass more cheaply and easily.

And in 1637, Europe went mad over Dutch tulips, resulting in what many economists consider the first economic bubble. At the height of that bubble, bulbs were selling for 10 times the salary of a skilled tradesman. Still, Dutch tulips thrive today, centuries after that speculative bubble burst.

His point is not to get too bent out of shape over the word “bubble.” Yes, speculation is inflating Bitcoin’s price.

The big questions, he says, is whether people will have a use for Bitcoin after all the speculation subsides. If its liquidity and speed of transaction are still attractive for users after this bubble moves on, then we can call it a success.

And as one commenter points out, the Tulip Mania example isn’t perfect because the supply of tulips could be affected much more easily than Bitcoin. Fields and fields of tulips can be planted (or wiped out, for that matter), but Bitcoin’s supply is kept in check by its protocols.

Thus, demand has to keep the price up, the thinking goes.

 

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