7 reasons why Bitcoin is a bubble
This article was originally published via Linkedin on 07/12/2017.
For all you crypto-enthusiasts out there, let me start by admitting that I wish I had bought Bitcoin a year ago, or even when I first heard about it back in 2013. However, I chose not to buy because I like to look at the fundamentals and invest for the long term.
So here are seven reasons why I think Bitcoin is a massive bubble:
Virtually EVERYONE from all parts of the world are interested. This includes people with zero interest and knowledge about financial markets and monetary theory.
Bitcoin has become a get-rich-quick scheme. In the real world, you go from poor to rich by producing something of value, through intelligence and hard work. In a bubble, you just have to join the club and watch your wealth multiply. The first people to get in and get out will make lots of money, but there will be a host of people at the bottom of the pyramid who will see their investment evaporate.
Cryptocurrency is an idea - but ideas can be copied. What fuels the crypto revolution is the belief that blockchain, the technology that underlines Bitcoin, will be used across the finance industry. But you can create blockchains without having anything to do with Bitcoin. Therefore the success of blockchain technology is not tied to Bitcoin, just as the success of the internet did not translate to the success of pets.com.
Decentralised money has to be commodity-backed. Commodities, such as gold and silver, are genuinely scarce resources and you can rely on their marketability for generations to come. If however, you have a central authority demanding that taxes and contracts be made good in the national monopolised currency, then it does not require commodity backing because it is backed up by the might of the state and its control over the economy. Cryptocurrency has neither commodity nor governmental backing.
Bitcoin is artificially scarce. Proponents say Bitcoin is a store of value because the supply is limited. But this limited supply is artificial as it was created by humans. The reason gold, for instance, is genuinely scarce is because it can only be created by two neutron stars colliding - bearing in mind that the crust of a neutron star is 10 billion times stronger than steel.
What's to stop a 'better' cryptocurrency from taking Bitcoin's market cap? This is one of the reasons why Bitcoin is not a long-term store of value or a safe haven.
Governments need to control money. Tax evasion and money-laundering are the reasons why governments insist that they must control the money supply. Therefore, there is a chance that decentralised cryptocurrency could simply be outlawed for the 'greater good of the nation and the global community'. This is similar to what happend when secret Swiss bank accounts were abolished for foreign investors, due to pressure from the G20 and OECD.
I think it is healthy that people are questioning the existing monetary systems and the fiat currency that we use in our daily lives. However it would be helpful if crypto-enthusiasts could look further into monetary history and understand that commodity-backed money is a necessary requirement for the emergence of money, without the assistance of a central authority.
Therefore I believe that a combination of blockchain technology and physical gold and silver is a viable alternative to our current monetary system. Without the commodity-backing, what's to stop it from going to zero?