A couple of months ago I wrote about Bitcoin bubble. At that time, the price of Bitcoin was around $10,000, and still heading up. The mania was almost at its peak. In that column, I pointed out the obvious, that this was a speculative bubble, and that it would inevitably end badly. I also pointed out that contrary to anyone's view on Bitcoin itself, the mechanics of buying Bitcoin looked quite shaky. Basically, people are transferring money to accounts about whose antecedents they had no knowledge of, and in return, their phone or computer screens displayed some numbers that made them happy.
When the article came out, I was quite surprised at the sheer volume of critical mail I got. I often speak bluntly about a lot of things but never have I received such a torrent of criticism and even contempt that I got upon calling Bitcoin a bubble. However, I'm not writing a I-told-you-so column here. Rather, I'm trying to understand this phenomena. Most Bitcoin investors I know personally, are pouring money, along with their heart and soul into it. Bitcoiners have unwavering faith in Bitcoin. It is as if they are indoctrinated to a new religion.
My sense is that many of them feel that Bitcoin opens the door for them to get rich very quickly, without getting involved in conventional investing. More importantly, many of them seem to feel that they don't have to depend on brokers and tipsters or analysts to understand this stuff. They can read up to know as much as anyone else. Most of the mail I got was along the lines of 'What can people like you understand, this is TECHNOLOGY!'.
Surprisingly, a lot of Bitcoin investors give the macroeconomic argument for why they think it will eventually be worth much more. There are only a limited number of Bitcoin that can be created, therefore, unlike fiat currencies, it will never get devalued. It is expected to go up with time. Interestingly, till sometime back, real estate dealers used to give the same argument--that land can't be created-- hence, its price will go up. For the Bitcoiners, the only rational explanation for the current decline are the conspiracy theories doing the rounds. Of them, the most popular is the following story, powerful countries and institutions like the Chinese government and Goldman Sachs, are now united to destroy Bitcoin. Because, you know, if they don't then Bitcoin will destroy them.
Unfortunately, the problem with Bitcoin is at the entry level, which are not visible to these investors. At the individual level, I find that hardly anyone is discovering Bitcoin themselves, downloading the software, creating their key and their wallet and so on. Instead, a kind of a multi-level marketing network has come up over the last two years at the start- point. Every 'investor' has been sold the idea by another investor, who has introduced them to someone who's a sort of a broker or an operator. In recent weeks, those who are trying to sell Bitcoin have been issued 'tokens' of some kind. Cases of 'investors' actually realising the proceeds of a sale into bank accounts with real money seem to be non-existent after the crash has started in earnest. My sense is that at the entry level in India, all the 'Bitcoin monetary policy' talk is nothing but part of the pitch used to market straightforward ponzi schemes.
Interestingly enough, there is now widespread suspicion that at a much higher level, among the Bitcoin exchanges that are known around the world, the situation may be somewhat similar. In the last few days, there are many news stories about Bitfinex, which claims to be the largest exchange in the world, which raises serious doubts about what exactly is going on inside the organisation. You can Google for these news stories, particularly the ones published by the New York Times and Bloomberg.
Of course, one must question what exactly is the future of Bitcoin. It’s pretty much certain that bitcoin can no longer be used as currency. You are not going to make a payment for anything in a currency that could rise so rapidly. You don’t want to be Laszlo Hanyecz, who bought two pizzas for 10,000 bitcoin in 2010. Similarly, you wouldn’t want sell anything in a currency that could fall so rapidly. Either way, Bitcoin seems doomed to a future--no matter how long or short--as a vehicle for pure speculation. Or, if you prefer, a mass delusion.
And I'll now brace myself for the hate mail. It should be interesting.
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