Sooner rather than later the old story will end the old way, adding another chapter to the chronicle of investment folliesby Paul Wallace / December 13, 2017 / Leave a comment
Over the past few years most people have either ignored bitcoin, dismissing it as a fad that would fade away, or they have predicted an imminent collapse in its value. But it is now impossible to ignore the “cryptocurrency,” so-called because cryptography is used to secure and verify transactions and to shield the identities of its owners. Bitcoin continues to defy the naysayers as it soars ever higher.
This week brought the first trading in bitcoin futures, which started with a bang as prices initially surged by 25 per cent. At the end of last year each bitcoin was worth around $1,000. It surged last week from around $11,500 to a high of just over $17,000. After falling back it has since spiked even higher this week.
Yet bitcoin shares so many similarities with past investing frenzies that it seems certain to share their fate as well. The bubble will eventually burst and those who have bought the cryptocurrency most recently will be the greater fools.
For its evangelists, bitcoin is a piece of a digital future that will sweep paper currencies and bank deposits into the dustbin of history. Bitcoin, a decentralised digital currency, is the most striking application of the blockchain, a technology that is genuinely innovative by allowing people to collaborate through creating a shared digital ledger that does not require a third party or central authority (a full explainer on Blockchain can be found here). Big banks are already exploring its potential in operations such as settling trades. But cryptocurrency enthusiasts hope that it can be used to do away with those same banks—along with note-issuing central banks—by facilitating peer-to-peer transactions that bypass financial institutions altogether.
Conceived at the height of the financial crisis in late 2008 when banks had come close to dispensing with themselves anyway, the cryptocurrency was launched in January 2009. Bitcoins are “mined” through a number-crunching process that gets progressively harder. The miners also earn less through regular “halving events” that have already reduced the reward for each new digital ingot from 50 bitcoins at the outset to 12.5. As in a gold mine the rich seams have already been exploited and it is getting harder to extract more. There are currently 16.7 million bitcoins and the limit is 21 million. Mining the extra ones now requires so much computing power that miners…