The Coming Bitcoin Crash
By Joel D. Joseph
(Mr. Joseph is an economist and a lawyer.)
Bitcoin is a disaster waiting to happen. The price of bitcoins has gone through massive gyrations of appreciation and depreciation referred to as "bust and bubbles". Bitcoin is a digital currency that was invented in 2008 by an unknown person, or group of people, using the name Satoshi Nakamoto. The currency came into use in 2009. The bitcoin has no intrinsic value like silver, gold or shares of a company.
Fortunes have been made and lost trading bitcoins, just like those trading tulip bulbs in 17th-century Holland. One Bitcoin is now worth $100,000. There are now two billion bitcoins in existence with a total value of two trillion dollars.
Tulipmania
Tulipmania is the story of a major speculative bubble that took place in the 17th century as Dutch investors began frenetically to purchase tulip bulbs, pushing their prices to unprecedented highs. During Tulipmania, the average price of a single buld exceeded the annual income of a skilled worker and cost more than some houses at the time. The same is true of the bitcoin.
Before 1633, Holland's tulip trade had been restricted to professional growers and experts, but the steadily rising prices tempted many ordinary middle-class and poor families to speculate in the tulip market. Homes, estates, and industries were mortgaged so that bulbs could be bought for resale at higher prices. Sales and resales were made many times over without the bulbs ever leaving the ground, and rare varieties of bulbs sold for the equivalent of hundreds of dollars each. The crash came early in 1637, when doubts arose as to whether prices would continue to increase. Almost overnight the price for tulips collapsed, sweeping away fortunes and leaving behind financial ruin for many ordinary Dutch families.
The Dot-Com Bubble
The dot-com bubble was a stock market bubble that inflated during the late-1990s and peaked on Friday, March 10, 2000. This period of market growth coincided with the widespread adoption of the Internet. There was rapid growth of valuations in new dot-com startups. Between 1995 and its peak in March 2000, investments in the NASDAQ composite stock market index rose by 800%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble.
Investors lost an estimated $5 trillion in the dot-com bubble. The bubble burst in 2000, causing a market panic that led to massive selloffs of dot-com company stocks.
Amazon's stock price dropped from $113 per share in December 1999 to $5.51 in late 2001. And Amazon was one of the few survivors of the Dot Com Crash.
The rise of the bitcoin has a similar history. One minor difference is that stocks actually have intrinsic value while bitcoins do not. In 2011, the value of one bitcoin rapidly rose from about thirty cents to $32 before returning to $2. On November 29, 2013, the cost of one bitcoin rose to a peak of $1,242. The next year, the price fell sharply, and as of April remained depressed at little more than half of 2013 prices. As of August 2014 it was under $600. In July 2021 the price of a bitcoin is $32,501, well below its all-time high of $60,000. Bitcoin was worth just over $60,000 in both February 2021 as well as April 2021. Now the Bitcoin is worth $100,000.
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