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Bitcoin bubble: Bitcoin bubble?
In 1637, the Dutch experienced a phenomenon known
Risks to the payment as "Tulipmania." The introduction of the tulip to the
Netherlands from Turkey created a frenzy, and the
system demand for tulip bulbs far outstripped the intrinsic
value of the underlying asset. The resulting "bubble" in
tulip bulb prices and the subsequent market correction
Edward Barton were well documented at the time, and such bubbles and
corrections have oft been repeated throughout financial
G2 Web Services history. The two most recent cases are the Internet stock
bubble of 1999 to 2001 and the real estate bubble in the
itcoin is a decentralized digital currency that United States from 2005 to 2008.
provides the ability to send payment over the
Internet or through other electronic media. Bitcoin is following the same historical bubble pattern
B While bitcoin has many perceived advantages of volatile and irrational prices in response to publicity,
to traditional electronic payment methods, it introduces assumed features and perceived scarcity. Bitcoin also
significant risks to the payment system, as well as to has significant disadvantages that limit its usefulness
merchants and acquirers that accept bitcoin as a form of as a medium of value. This will likely result in a bitcoin
payment. bubble burst in the near future.
Additionally, bitcoin has all the trappings of a "bubble" Those disadvantages are:
that threatens to burst in the near future.
• Bitcoin enables fraud and other criminal activities,
Bitcoin advantages which likely will attract regulation and law
enforcement efforts against legitimate exchanges.
Bitcoins have perceived advantages to traditional We have already seen this in the People's Republic
electronic payment methods, including: of China, where restrictions on bitcoin resulted in
dramatic shifts in the value of the currency.
• Bitcoins can be transferred person to person • Bitcoin has no intrinsic value. The mining process
without going through an exchange or bank. creates a digitally encrypted data set that was
• Because they are digital, bitcoins can be used and created from nothing, continues to be nothing,
accepted globally. and has no use or underlying asset value. Even
• Due to the fact that they are decentralized, fiat currencies, such as the U.S. dollar, are backed
bitcoins cannot be easily seized or frozen by law by government and central banks. Bitcoin is
enforcement. entirely ephemeral.
• The combination of the three advantages just
listed keeps a high level of anonymity for the • Bitcoin's anonymous nature – similar to currency –
user – similar to paying with traditional paper has a similar challenge. Bitcoin can be easily stolen
currency. or lost. The advantage of perceived anonymity
creates an opportunity to steal with impunity.
Bitcoin is merely one of a number of digital currencies, There are two famous stories exemplifying this.
including litecoin and nibble, among others. As of One is of the journalist whose bitcoin was stolen
November 2013, my colleagues and I had identified more on the air during a December 2013 Bloomberg
than 75 variants of digital currencies; we continue to TV broadcast. This happened when the quick
identify such currencies and monitor their use. response code containing the private key for
How are bitcoins made? a bitcoin gift certificate was displayed for 10
seconds, during which one viewer scanned the
Bitcoins are "mined" by servers performing complex image and redeemed the gift himself. The full
calculations. The design of the currency limits bitcoin to story is at http://rt.com/usa/bloomberg-anchor-
21 million units, which will be mined between now and robbed-bitcoin-747/.
the year 2140.
• The second widely reported incident involved
The complex mining process ensures that the supply of a British man who threw out a hard drive that
bitcoin will remain reasonably predictable, while serving contained 7,500 bitcoins he had mined using a
as a counter to inflation common with traditional "fiat" laptop computer in 2010. The computer became
currencies. (Fiat money is defined in several ways. It damaged, and he eventually threw it out. He
can be money that is: declared to be legal tender by didn't realize his mistake until it was too late to
a government; state-issued, cannot be converted to retrieve the device. At the time the story broke in
anything else and cannot be fixed in value according to 2013, the estimated value of his bitcoin was more
an objective standard; or that has no intrinsic value.) than $7.5 million. Further details are at http://
36
Bitcoin bubble: Bitcoin bubble?
In 1637, the Dutch experienced a phenomenon known
Risks to the payment as "Tulipmania." The introduction of the tulip to the
Netherlands from Turkey created a frenzy, and the
system demand for tulip bulbs far outstripped the intrinsic
value of the underlying asset. The resulting "bubble" in
tulip bulb prices and the subsequent market correction
Edward Barton were well documented at the time, and such bubbles and
corrections have oft been repeated throughout financial
G2 Web Services history. The two most recent cases are the Internet stock
bubble of 1999 to 2001 and the real estate bubble in the
itcoin is a decentralized digital currency that United States from 2005 to 2008.
provides the ability to send payment over the
Internet or through other electronic media. Bitcoin is following the same historical bubble pattern
B While bitcoin has many perceived advantages of volatile and irrational prices in response to publicity,
to traditional electronic payment methods, it introduces assumed features and perceived scarcity. Bitcoin also
significant risks to the payment system, as well as to has significant disadvantages that limit its usefulness
merchants and acquirers that accept bitcoin as a form of as a medium of value. This will likely result in a bitcoin
payment. bubble burst in the near future.
Additionally, bitcoin has all the trappings of a "bubble" Those disadvantages are:
that threatens to burst in the near future.
• Bitcoin enables fraud and other criminal activities,
Bitcoin advantages which likely will attract regulation and law
enforcement efforts against legitimate exchanges.
Bitcoins have perceived advantages to traditional We have already seen this in the People's Republic
electronic payment methods, including: of China, where restrictions on bitcoin resulted in
dramatic shifts in the value of the currency.
• Bitcoins can be transferred person to person • Bitcoin has no intrinsic value. The mining process
without going through an exchange or bank. creates a digitally encrypted data set that was
• Because they are digital, bitcoins can be used and created from nothing, continues to be nothing,
accepted globally. and has no use or underlying asset value. Even
• Due to the fact that they are decentralized, fiat currencies, such as the U.S. dollar, are backed
bitcoins cannot be easily seized or frozen by law by government and central banks. Bitcoin is
enforcement. entirely ephemeral.
• The combination of the three advantages just
listed keeps a high level of anonymity for the • Bitcoin's anonymous nature – similar to currency –
user – similar to paying with traditional paper has a similar challenge. Bitcoin can be easily stolen
currency. or lost. The advantage of perceived anonymity
creates an opportunity to steal with impunity.
Bitcoin is merely one of a number of digital currencies, There are two famous stories exemplifying this.
including litecoin and nibble, among others. As of One is of the journalist whose bitcoin was stolen
November 2013, my colleagues and I had identified more on the air during a December 2013 Bloomberg
than 75 variants of digital currencies; we continue to TV broadcast. This happened when the quick
identify such currencies and monitor their use. response code containing the private key for
How are bitcoins made? a bitcoin gift certificate was displayed for 10
seconds, during which one viewer scanned the
Bitcoins are "mined" by servers performing complex image and redeemed the gift himself. The full
calculations. The design of the currency limits bitcoin to story is at http://rt.com/usa/bloomberg-anchor-
21 million units, which will be mined between now and robbed-bitcoin-747/.
the year 2140.
• The second widely reported incident involved
The complex mining process ensures that the supply of a British man who threw out a hard drive that
bitcoin will remain reasonably predictable, while serving contained 7,500 bitcoins he had mined using a
as a counter to inflation common with traditional "fiat" laptop computer in 2010. The computer became
currencies. (Fiat money is defined in several ways. It damaged, and he eventually threw it out. He
can be money that is: declared to be legal tender by didn't realize his mistake until it was too late to
a government; state-issued, cannot be converted to retrieve the device. At the time the story broke in
anything else and cannot be fixed in value according to 2013, the estimated value of his bitcoin was more
an objective standard; or that has no intrinsic value.) than $7.5 million. Further details are at http://
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