Final lessons from the bitcoin mania

Towards the end of 2017 and the beginning of 2018, I wrote a couple of columns in which I noted that the beginning of the deflation of the bitcoin bubble had not dampened the spirits of the true believers. At that point of time, the so-called price of bitcoin was down from around USD 20,000 to US 9,000 in about a year. Now, after a year has gone by, this number is down to around USD 3,500. However, unlike many other financial manias of the past, the fervour with which the believers go on believing and have invented a number of fascinating conspiracy theories which offer explanations of how bitcoin has been sabotaged by, basically, everybody.

Last year, I'd pointed out with the help of an animal fable about monkeys and goats, that even the best of investors end up buying overpriced investments. However, buying overpriced investments that have some real value and buying an investment where the inherent value is suspect are two very different things. When that column was published, the punishment that bitcoin believers meted out to me was swift and exemplary.

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. My sense was that many, perhaps most bitcoiners felt that here was a new thing that they didn't need any pre-established entities or people or ideas help to deal with it. They could read up and be as much of an expert as anyone else. Most of the mail I got was along the lines of 'What can people like you understand, this is TECHNOLOGY!'.

Even at that time, the conspiracy theories had started. In those days, for some (no doubt bizarre) reason, the commonest theory was that the Chinese government and Goldman Sachs joined forces to destroy Bitcoin, because if they did not then Bitcoin would destroy them. This has now been extended to practically everyone. Almost every jurisdiction and regulator in the world has either warned against or outright banned bitcoins, and every major carrier of online advertising has stopped carrying bitcoin-related ads. To bitcoin conspiracy theorists, all this has proven that they were correct.

One of the many strange things about the bitcoin mania was this widespread belief that bitcoin was a great idea because it's independent of governments and central banks or any other central authority. The reality was that hardly anyone was buying Bitcoin in that way--understanding the tech, downloading the software, creating their key and their wallet and so on. Instead, closely observing bitcoin 'investors' at the grassroot level in India revealed a kind of a multi-level marketing network. 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 practice, people downloaded an app, gave money to someone, then felt happy when some ever-larger numbers appeared in the app. To anyone with a modicum of scepticism, this did not look a system that is liberated from all government and central authority. In fact, it's the worst of all possible worlds. In the end, bitcoin mania has reached where it has because almost everything was wrong with the bitcoin bubble. A nerd's experiment with creating a cryptographic currency mutated into a global mania, one which the believers fervently believed was free of the limitations of human psychology and greed because it was surrounded by techno-libertarian wishful thinking. Till a point, before the mania took off, it was useful for anonymous electronic payments, specially for the commerce that takes place on the so called 'Dark Web'. However, the bubble inflated, bitcoin apparently became useless as a currency even for the denizens of the dark web.

Make no mistake, this was a pure speculative mania with no connection to any ground reality. In the long run, it'll probably be useful for psychologists who study such things but that's all.