Bursting The Bitcoin Bubble

Like the miracle worker of Golaghat, the Bitcoin, a veritable goddess Lakshmi, promises to shower its followers with unlimited wealth.

‘Bitcoin’ has come to define a magical online currency that is rebellious enough to spook regulators and hip enough to appeal to the millennial generation. The bad boy of currencies, it has risen to prominence since people realized its growth is stratospheric and supply limited.

This is not an article explaining the benefits of investing in Bitcoin or other crypto currencies. It will not offer unsolicited advice on how to invest but will aim provide some insight on why we invest.

Bitcoin Bubble And The Glamour of Gambling

Picture James Bond, in Casino Royale, betting big in that famous game, enjoying his martini and then going back with some hotshot woman. The Hangover, demonstrated how Alan’s blackjack skills saved the day. There are many such examples of gambling being shown as glamorous, in popular culture.

Most rich people in India enjoy their gambling contests and shuffle around cards on Diwali. If people could stop speculating, we could have avoided the dot com bubble as well as the numerous chit funds scams that plague India.

The underworld dons as well as people with shady reputations, best represented by Emran Hashmi in various movies, wouldn’t have gone to horse races. Two and Half Men’s iconic Charlie Harper would have watched sports because he actually liked following a team, and not just because he was betting on one.

Betting is an age-old tradition interwoven in cultures across the world. It is linked to the rise and fall of civilizations. Babur made a good bet when he left the tumultuous Central Asia and made his way to the fertile lands of Hindustan, thus starting the Mughal Empire.

The Birth of the Bitcoin Bubble

2017 saw a massive decline in real-estate prices. Currency values fluctuated, and investments were down. The 2008 crisis made erstwhile robust investments seem risky.

It was in this vacuum that Bitcoin came into existence. Bitcoin is created through mining, a process most investors aren’t privy to. The fact that it has a limited supply causes a sense of urgency in prospective buyers. Apparently, there are people who have made outrageous amounts of money on Bitcoin’s value appreciation. These people have recommended it to the others they know.

And thus, the vicious circle begins.

Recently, a colleague of mine, considered a fun guy, was missing his usual enthusiasm at work. Instead of his computer, it was his cellphone that had all his attention today.  His expression kept changing every ten minutes.

Concerned, I asked him if there was something wrong. That’s how I found out he was trading in. He barely knew anything about what he was doing but had the confidence of a mortgage trader before the 2008 recession.

Upon the advice of some friend (it always starts like this), he had invested in some crypto currency, which is pegged to Bitcoin. The mobile app, which powered this transaction, sounded shady and the possibility of getting the money out was tough. Yet, he had put in a reasonable amount and kept lamenting that he had been late to the party.

His enthusiasm was contagious and many people expressed an interest in following in his footsteps. These people also requested him to act as a broker on their behalf and were eager to part with their own hard earned money for the promise of large returns.

Of Returns, Luck and Hubris

Daft Punk was up all night to get lucky and so are most day traders who time the market and exit when the iron is hot. Many have developed rigorous quantitative methods to nullify their risks. However, most of these methods failed to prevent the 2008 sub-prime crisis. The crash taught us that ‘black swan’ events, which represent the highly improbable, could occur anytime.

Another arena where luck trumps skill is a game called Ludo, often played by people in India to pass the time. You progress in the game by moving to the roll of the dice. It is pure luck that decides the outcome but people often attribute their lucky win to a special technique of rolling the dice or such hogwash.

The lesson Ludo teaches us is that luck and chance can result in a positive feedback loop, which makes people feel that there is something inherently special in them.

However, there is a right time to exit an investment. Those who consider themselves successful investors often have a hard time realising that.

An ideal example is Yudhisthira who couldn’t bring himself to exit the game of dice with Shakuni. He kept hoping that his fortunes would change. If Yudhisthira has realised his folly and stopped gambling, he may not have lost everything, including his family. If only he had chosen to exit the game, even at a low point, he may have prevented one of the most gruesome wars in mythology.

Is There A Basis For The Bitcoin Bubble

Basic economic theory holds that things have either a use value or a transactional value. Therefore, national currency has transaction value as it represents the final value of goods and services produced in a country. As the demonetization in India proved, currency has no real value in itself until it is accepted as a means of payment.

Bitcoin is now being accepted as a method of payment in some countries. It is also easier to complete foreign transactions through Bitcoin because of lesser paperwork. Bitcoin may  become the currency of the future and go on to be widely accepted and traded. But as of now, Bitcoin’s value seems to be swinging wildly based on market sentiment.

The Dutch Tulip Mania, the dot com bubble and the 2008 recession have taught us that asset bubbles burst and linked asset prices can come crashing down. Naysayers might argue that stock prices, national currencies and commodity prices also fluctuate.

But the fact remains that a stock price is linked to the performance of a company. Analysts can track a company’s performance and predict its stock prices. Similarly in case of national currency, an increase in foreign exchange earned through exports can increase the value of the currency.

A demand for a commodity like uranium could increase if the nuclear energy industry grows and drives up the price of uranium. This is common sense and most investors in commodities seem to be able to make these connections.

However, in the case of Bitcoin this kind of knowledge seems to be lacking because it’s value cannot be calculated based on traditional parameters. To play a game it is necessary to know the rules. Therefore, one must be thoroughly well researched and informed before investing in Bitcoin. Most investors are indulging in pure speculation and hearsay, instead of doing their own research and educating themselves about crypto currency.

Don’t Let the Bitcoin Bubble Make You Throw Caution To The Wind.

To conclude, just like any decision in your life weigh out your pros and cons before you invest in Bitcoin. Read articles, gather data, understand mining and then go ahead and invest in Bitcoin. It’s never right to invest in any commodity without being armed with facts and analysis.

We are being bombarded on a daily basis with advertisers and marketing affiliates who only see us as consumers and keep pushing products. What if existing investors are selling Bitcoin to you as a good investment since they stand to gain through value appreciation?

Find your own answers and next time someone tells you about Bitcoin prices, ask them to explain how Blockchain works and how it’s better than double entry accounting. If they look at you with a blank face, call them out for being ill informed and move on.

This is the second article in our Peddler of Dreams series.

By Couchcynic.