The history of price bubbles may reveal the next step of bitcoin

In the invention bitcoin nearly 170 years ago, reporter Charles Mackay (Charles Mackay) pointed out that the whole community are likely to focus on an object, then crazy for it”. He wrote, “at the same time, millions of people on a false impression, and chasing the illusion until their attention is more attractive than the first new stupid attraction”.

In 1841 he published “extremely popular and illusion crazy” in one book, pointed out that the price of the sale of goods in a series of speculative bubbles — people with more and more, until suddenly No. He cited the most famous example is the beginning of seventeenth Century swept the Holland tulip mania. The tulip price surge in prices before, each price is as high as 25 thousand Florin (equivalent to today’s exchange rate is close to 32 thousand and 400 U.S. dollars).

Bitcoin bubble beyond this point, than all the other cases found mckay. This is probably the most serious since the end of the nineteenth Century bubble. In four years, its price soared nearly 2800%, reached a peak of $19783 in December 2017. Since then, it has fallen by 80%. A month ago, the trading price of more than $6000, now down to $3500.

For those before May 2017 (when the price of bitcoin is less than $2000) or May 2016 (when the price of bitcoin is less than $500) to buy bitcoin people, this is still a huge gains.

But it will continue to decline? What makes bitcoin worth?

To answer this question, we need to know is what creates value lead to speculative bubbles, then what is the cause of the price slump.

When the asset value deviated from * *

We usually think of stocks or bonds and other financial assets in the bubble, but they may also occur in real assets (such as real estate) or commodities (such as tulip bulbs).

When people are willing to pay the price of something significantly deviate from its intrinsic value, the bubble began.

The intrinsic value of the assets is the theory, with its “basic” value based. The basic value includes the ability to generate cash flow (such as interest or rental income), scarce or rare value (such as gold or diamonds), and potential applications (such as silver and platinum are used in jewelry products and industrial management).

Due to the scarcity of land, housing or rental income generating capacity, the housing may have the basic value. Tulip (or coins) without these things, when you consider all the available alternative tulip (or encryption currency), even if the scarcity assumption does not exist.

* * a prerequisite for price bubbles

The foam is often appeared in a period of time after the economic growth, in this period of time, investors will get used to rising asset prices, credit is also very easy to get.

Under these conditions, must add something to the formation of foam. This is usually a major interference or innovation, such as the development of new technology. Think of the railway in nineteenth Century, early twentieth Century and late twentieth Century Internet power.

At first, most investors tend to a new technology of cautious and rational attitude. For example, the early use of the limited competitive advantage of railway investment, focus on profitable lines. It is gradually achieve commercial success.

This creates higher growth and profitability, has brought positive feedback (from greater investment, higher dividends and consumer spending increase), thus further boosting confidence.

If conditions permit, it will become the economic historian Charles Kindleberger (Charles Kindleberger) called the “appreciation” period: investors become able to focus on through to higher prices of assets will be sold to the “greater fool” and profit.

That is to say, they are not attracted to the “fundamental” motivation — the dividend or rental income potential cash flow benefits – but “speculative” motivation — the pursuit of short-term capital gains.

Higher prices to attract more speculators, further pushing up prices. Around the new technology of the importance of uncertainty, the extreme valuations become reasonable, even as prices rise further, does not seem to be sufficient reason.

A virtuous cycle of rising prices continues, usually by credit driven, resulting in rising prices suspended until the event. Kindleberger believes that this may be a change in government policies may be unable to explain the failure of the company.

When asset prices stop rising, borrow money to buy assets investors realize that their debt interest payment of the cost of holding assets will not be obtained by capital gains offset. So they began to sell assets to reduce losses. Once the price began to fall, there will be more investors decided to sell.

Bitcoin bubble * *

Encryption of money market observers will find that this story is very familiar with. Before bitcoin, the United States experienced one of the longest economic expansion in history, easily available credit, global interest rates are at their lowest level in 5000 years of civilization.

Bitcoin prices have attracted speculators into the bitcoin market, thanks to the close attention of the media. Some people use a credit card or housing to mortgage to pay bitcoin. Bitcoin prices for more unrealistic, said bitcoin may rise to 10 million, although there are more sober warning.

Bitcoin price increases may be the cause of suspension, people worried that the government will strengthen the encryption assets supervision, the central bank may launch a digital currency, and a large number of assets plaguing bitcoin theft and collapse of the brief history of the exchange.

Fell * *

In the market the stock liquidity in (in these markets, the sale of assets price is not high), prices may be severe. In illiquid markets, assets are not easily realized, the decline is likely to be cruel. For example, led to the global financial crisis of mortgage-backed securities and collateralized debt obligations (MBS) (CDOs).

Bitcoin, especially the lack of liquidity. This is due to a large number of different bitcoin exchanges in the competition, usually high transaction costs, and limited ability to block the transaction chain.

* * the consequences

The consequences may be cruel. The stock market crash of 1929 is a prelude to the great depression in 30s. In 1989 Japan after the collapse in asset values indicates that ten years of low growth and deflation. From 2000 to 2001 the Internet crash destroyed 8 trillion dollars.

The influence of collapse in the relevant asset size, ownership and importance. Effect of the collapse of the tulip is limited, because relatively few people involved tulip speculation. But in 2007 the real estate prices fell sharply caused the worst financial crisis since the great depression.

Bitcoin is more like a tulip. The valuation of the market in the peak of about $300 billion. Under this background, the United States stock market and property market capitalisation of more than $21 trillion. Relatively few investors have most bitcoin – it is estimated that 97% of the 4% users all bitcoin. This shows that bitcoin crash impact on the wider economy should be controlled.

To estimate the intrinsic value of bitcoin * *

There is a widespread controversy about the true value of encryption currency. Bitcoin entrepreneurs believe that the higher the price is reasonable. Some other people, such as the Nobel prize winner Eugene Fama (Eugene Fama) and Warren Buffett (Warren Buffett), that it is almost not worth a hair. The bank for International Settlements (BIS) described it as “a mixture of foam, Ponzi scheme and environmental disaster”.

To the intrinsic value of bitcoin is very difficult to make a realistic estimate, because it is not capable of generating periodic cash flows (such as rental income or interest) assets.

For this asset, its value depends on how many other people are willing to pay for it. This is usually scarce and relevant.

This does not provide a positive story for bitcoin. Although the amount of bitcoin is limited, but there are also many competing, almost indistinguishable encryption currency (such as Ethernet Fang and reboxetine currency).

Bitcoin does not conform to the standard currency. Changes in the price of it is too unstable, not as a unit of account. Blockchain trading capacity is too limited, not as a medium of exchange. It seems not a good store of value.

Since bitcoin does not produce income, the scarcity of limited value, few people are willing to use bitcoin as a currency, bitcoin may even have no intrinsic value.

(source: Friends of financial network)

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