Inside the Bitcoin bubble

In 2013, IT worker James Howells accidentally threw away his laptop. What would be a frustrating situation for anyone was heightened by the hard-drive’s containment of more than $100 million worth of the cryptocurrency Bitcoin.

When he threw away the laptop, now buried somewhere in a vast landfill site in Newport, the Bitcoin was worth several hundred thousands. However, in recent months, the value of the currency has shot up to more than £8,000 per bitcoin. Talking about Bitcoin is en vogue again.

As of February 2015, over 100,000 merchants and vendors took Bitcoin as accepted payment. Figures from the University of Cambridge suggest an estimate between three and six million individuals using Bitcoin.

The identity of the designer of Bitcoin is unknown and shrouded in mystery and conspiracy theories. Using the alias of Satoshi Nakamoto, the individual or group behind the currency published a research paper outlining their digital currency system. The publication was released in October 2008, a few weeks after the collapse of the Lehman Brothers bank. Although its designer said they started writing the code in 2007, it is clear to see why an idea that surpasses the middle man of a central bank at its core seemed so attractive.

“Bitcoin will do to banks what email did to the postal industry,” proclaimed Rick Falkvinge, the founder of the Swedish Pirate Party, whose political principles focus on individuals’ privacy and personal liberty in the digital sphere.

Other advocates for the currency have dubbed it “the honest currency,” emphasising the Bitcoin’s anonymity and directness. This anonymity has earned the currency a reputation of being associated to crimes like drug dealing and money laundering. An online black market site, Silk Road, used it when arranging the selling of illegal drugs.

“If you were a drug dealer, a murderer, stuff like that, you are better off doing it in Bitcoin than US dollars,” said Jamie Dimon, the CEO of the JP Morgan bank.

The Bitcoin is by no means stable. In September, when JP Morgan’s Jamie Dimon described it as fraudulent and dangerous, the value of a bitcoin decreased by 10 percent. Cynics and critics of the cryptocurrency, including Dimon, say investments will eventually backfire, with mass losses.

Comparisons have been made to ‘Tulip mania’, where prices for the fashionable flower reached incredulous heights before suddenly dropping, in the seventeenth-century Dutch Republic. According to the journalist Charles Mackay, writing two centuries later, at one point a single bulb could be exchanged for a basket of goods worth 2,500 florins that would include twelve sheep, eight swine, a complete bed, and a silver drinking cup.

“Everyone imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them,” wrote Mackay.

But in the winter of 1637, trades ran out of customers willing to pay the extortionate prices and the prices dropped.

This crash is similiar to the dot-com bubble, which occurred at the end of the twentieth-century. From 1997, the number of businesses and individuals using and adapating the Internet grew by monumental amounts.

However, in the first few years of the twenty-first-century this bubble collapsed. Many companies failed.

Cynics of cryptocurrencies argue that Bitcon is headed for a similiar disaster.

Japan, China, and Australia have started to consider regulating Bitcoin, something others may follow.

Sonali Basak, writing for Bloomberg, states that whilst banks are interested in the Bitcoin hype, they have been “reluctant to jump into the largely unregulated and opaque market, in part because of concerns they could run afoul of rules, such as strict requirements for preventing money laundering.”

H. Rodgin Cohen, the dean of Wall Street lawyers, believes the most sustainable plan for the currency would be to introduce a regulatory group  led by the Treasury Department. Time will tell.


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