Bitcoin, an Irrational Exuberance?

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Bitcoin mania is everywhere. Read the last sentence again. The word ‘mania’ holds a lot of significance. By contrast, bitcoin itself is yet to find undisputed acceptance in global trade and commerce.

A brief history of bitcoin in price terms

First things first. Invented in 2008, bitcoin was anything but an instant craze. Instead, its early acceptance was in the black market. Silk Road, the online marketplace for trade in illegal substances, was among its first users. The volatility in its prices is also not a recent occurrence. The year 2011 saw its prices rising from US$0.30 to upwards of US$5.00 and then suddenly reaching US$30.00 before falling again to single digit by the last quarter of the year.

Come 2017, and the picture saw a sudden turn in events. From under US$1,000 level, the cryptocurrency entered 2018 with a whopping US$13,000 price tag.

Volatility, however, refused to go. Prices went from skyrocketing to plummeting extreme south in the entire 2018 with bitcoin having under US$4,000 price tag on the first day of 2019. 

Is it Madoff?

Dubbed as the most popular ‘decentralised digital currency’, bitcoin can remind you the disgraced stock trader, Bernard L. Madoff. His death in prison has reignited popular interest in his story where he once was arguably the most sought-after broker and investment guru in the US. And there is a reason why we have invoked him when discussing what future might hold for bitcoin.

Popular filmmaker, Steven Spielberg, was his client. The Ponzi scheme Madoff ran for decades didn’t appear as if a scam to his clients. The reason- he promised modest returns (12 percent annually) and the association of big names that even included a Nobel Laurette lent credibility to his venture. Compare this with names like Elon Musk and Jack Dorsey endorsing and funneling money into bitcoin investment.

What’s more? Madoff is credited with being the ‘agent of change’ in the traditional stock market for his introduction of technology. This made trading both faster and easier for retail investors. In fact, Madoff was NASDAQ chairman in the early 1990s.

Bitcoin is hailed as being the change agent when it comes to decentralised currency that is not owned and/ or controlled by any central bank. Bitcoin ETFs have flooded the Canadian markets, and people are enthusiastic to have them in their investment portfolio.

Is it gold?

Yes, parallels drawn above aren’t a perfect apple-to-apple comparison. And what if bitcoin turns out be an ‘investment’ option alone rather than becoming a universally accepted digital currency?

Now this is something really interesting. Gold, the rare precious metal, isn’t a currency, but it is irrefutably one of most popular investment options.

Bitcoins too are rare. Their supply cannot be abruptly increased, for they have to be ‘mined’, and this mining process is really complex and involves not just programming skills but also huge investments in infrastructure.

Is the exuberance rational or irrational?

One may compare bitcoin frenzy with either the disgraceful Madoff saga or the timeless gold investment tale. No investment guru can, at least for the time being, tell what future holds for bitcoin and its backers. For you as a reader, it’s your choice to make. And while we write this, one bitcoin equals US$63,000+.


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