Posted on 16th Oct 2017 at 1:52 PM from Warwick, UK
Bitcoin... By now the world and his wife have heard about Bitcoin. I've been asked recently for my thoughts so I am sure it is high time I wrote a few words.
The spectacular rise of Bitcoin in recent months is nothing short of incredible. We've all heard stories about early adopters throwing away hard drives containing dozens of Bitcoins but this is a bit of a distraction. More import is the rise over the last 12 months or thereabouts. Just one year ago, one Bitcoin was worth about £515. As I write this one Bitcoin is now valued at £4312!
There is absolutely no doubt in my mind that Bitcoin is a bubble. And bubbles pop. Nobody can predict when but all bubbles will, sooner or later, burst and when that happens a great deal of value will be wiped from Bitcoin.
Bitcoin is just one of an amazing selection of cryptocurrencies. It is the most well known and, unsurprisingly, the most traded. But there are lots of others. The most famous being Etherium. The whole world of cryptocurrency is in a bubble, not just Bitcoin. We can look at financial history to see what happens when a bubble bursts.
In the past there have been two distinct types of bubble as I see it. There are those built on nothing but hype. The first recorded bubble, the tulip mania of the 1620s. During this time the price of tulip bulbs in Holland was inflated for no reason other than social hype. There was nothing fundamentally new about tulip bulbs. Contrast this with some other bubbles such as the mania for railways in the 19th century or the more recent dot.com bubble. These latter examples changed the fabric of society forever. And this is the sort of bubble I think we are now in with cryptocurrencies.
There is one important difference between cryptocurrency and tulips, railways or dot.com technology. Bitcoin and cryptocurrency represent a completely new asset class. Perhaps the first completely new asset class since 1694 when the British Government issues the first bonds to fund its war with France.
Despite cryptocurrency being in a bubble - a bubble that is sure to burst as dramatically as has been the rise of Bitcoin, I am investing in Bitcoin and other cryptocurrencies as I think there is still a long way for them to go yet. Given the price volitility and the future uncertainty, I am restricting my investments. There are excellent chances of making good returns in the short term.
When the collapse comes it will be sudden and will dramatically increase shake up not just cryptocurrency but other parts of the financial world. There is no way to predict which coins will be left afterwards and which will be the big winners. Before the dot.com crash it was not predicted that Google, Facebook and Amazon would be some of the biggest companies on the planet. The internet is integral to everyone's life now and, just like railway mania, the dot.com boom and bust changed society. The world will be a better place when the dust settles after Bitcoin.