Like tulips in the 17th century, Bitcoin was carried away by a bubble, which shows that speculators’ fever is recurrent. Today, tulips lead a down-to-earth existence, happy to be pretty and to herald spring. I’m still looking for the usefulness of Bitcoin.
Published on January 25, 2021 at 10:00 am
In 1637, Dutch merchants were paying crazy prices for bulbs of this exotic flower, imported from the Ottoman Empire, especially the rare variety with a tiger pattern. The first documented speculative crisis, « tulipomania » burned fake fortunes.
Nor will we have to mourn the eventual demise of the « whales », the nickname given to the big holders of bitcoins, who are not rich on paper, but extremely rich in the ether.
A strategist at the Bank of America has called the stratospheric rise of Bitcoin the « mother of all bubbles ». In March, when the pandemic hit, it first lost half its value. Bitcoin recovered the lost ground in the spring, stagnated in the summer and exploded in the fall. Since the March low, its price has increased sevenfold!
Unlike gold, to which it is sometimes compared, bitcoin has no material existence, no intrinsic value and its use is particularly limited. No jewellery or even fillings are made of bitcoin.
Its market value is influenced by its programmed scarcity and the complicated mechanism of its creation and exchange. The presumed links with the fundamentals of the real economy are fortuitous, a posteriori rationalizations that do not hold water. Psychological factors dominate.
Entirely virtual, Bitcoin is not a widely used, easy and cheap currency to use like the Canadian dollar – quite the contrary. Nor does it have a reliable value, a relatively stable purchasing power and cannot be used as a unit of account.
So what is it, then, if it is not a real currency? One asset, many answer. A strange financial object that does not fulfil any legitimate need, one might also say.
Chain of blocks
Bitcoin is governed by a chain of blocks, the name given to the decentralized registry where all transactions are recorded and which ensures their veracity. The authentication of transactions on this unregulated market is the result of a race to solve increasingly difficult mathematical problems, which are being tackled by competitors called miners, armed with computers that are as powerful as they are energy-intensive. The winner is paid in Bitcoins, which this computer competition makes expensive to produce.
The block chain is a slow system, capable of processing 4.6 transactions per second, compared to 1700 for Visa, and becomes congested when demand is high. In 2020, a transaction could take between 10 minutes and an hour and a half.
To cut the queue of transactions or avoid waiting weeks, users pay miners transaction fees, which can become exorbitant during peak periods.
It is estimated that 95% of Bitcoins are controlled by 2.8% of the anonymous accounts held by these famous whales, many of whom are believed to be Chinese miners.
However, since whales rarely sell, the Bitcoin market is not very liquid and relatively modest buying and selling volumes have a disproportionate impact on the price, hence its great volatility.
While the security of the block chain itself is rightly touted, the peripheral infrastructure is often vulnerable, whether it is the trading platforms, the exchanges specializing in cryptomoney, or the « portfolios » where Bitcoin is stored, which have been the subject of spectacular theft and fraud.
That said, the recent arrival of credible financial institutions in the provision of certain services is reassuring. However, this is not yet the blessing expected from its followers, because there is a clear difference between operating a growing business segment and investing one’s own money in it. Large institutional investors are still a long way from Bitcoins and other cryptosystems.
On the other hand, central banks in several countries, including the Bank of Canada, are working together to develop digital currencies in their national currencies. They still have many complex issues to resolve, but these digital national currencies will be secure, useful, and accessible to everyone.
The typical buyer of Bitcoins is a young man, attracted by the lure of quick profits. More recently, large fortunes have put a little money on it, which they can afford to lose. And can afford to lose.
In fact, the challenge is that someone crazier than oneself will buy Bitcoin at an even higher price, in the hope that another crazy person…
Because buying Bitcoin is not an investment, but a highly speculative game, a lottery sophisticated enough to seduce geeks. The anonymity of the transactions also attracts a fringe of libertarians and conspirators who have faith and who are waiting for the collapse of the world monetary order, just as others are waiting for the Second Coming of Christ.
They slip into the ranks of criminals and terrorists. According to one study, about a quarter of Bitcoin users are involved in illegal activities.* In December, the U.S. Treasury Department announced plans to require financial institutions to report Bitcoin and other cryptocurrency transactions over US$10,000 in order to better combat this scourge.
The Bitcoin world is a strange zoo. All things considered, I prefer tulips.
* Read « Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through Cryptocurrencies? »