When will the Bitcoin bubble burst this time?

While Bitcoin’s technology is interesting, Bitcoin as an asset is not.

[I’ve put a postscript in the end of this article, you might want to look at the charts and skip right there. The original was published on Nov 8 2013.]

The seemingly exponential rise of Bitcoin attracted hordes of speculators into the meat grinder the last few weeks. There are quite in the sausage now, and wondering what’s next. Bulls’ voices are calling: “Bitcoin is the bright technological future of money.” On the other hand, bears’ claim “Bitcoin is a speculative bubble that’s going to pop.” Oh, what can a pig do? What’s going on?

Speculators gave up their hard-earned dollars and Euros, and bought claims on numbers. In particular, they paid as much as $470 or more to own a claim on a number with some fun mathematical properties. Bitcoin’s technological magic of decentralized ledgers provides some comfort they someone else doesn’t own the same number.

Bitcoin owners don’t own rare metals, flammable crude oil, nutritious soy beans, fertile plots of land, or even tulip bulbs — not even claims on them. Not even frequent flyer miles. They don’t own currencies like dollar or Euro that are legal tender — ones that creditors are forced to accept when settling a bill or a debt. Bitcoins are claims on numbers. Nobody is particularly interested in defending the reputation of Bitcoin, unlike central banks of large countries trying to keep deposits in their safes, governments that protect citizens’ property rights with police and military, or even the airlines just trying to maintain their frequent flyer loyalty.

So what has driven them to Bitcoin? The brief answer is greed. The more people buy into the pyramid scheme of Bitcoin, the more expensive Bitcoin gets. Just remember real estate bubbles: the value of land is how much corn you can farm there per year, or perhaps 30% of what people living there earn in a year and would be willing to pay in rent — but the price can be much more than that. Those who get in early, get to sell to those who come in later. But Bitcoin is worse than land in the sense that its value is zero, and its price is all pure speculation. Bitcoin owners hope that others will buy those claims back and give them dollars and Euros they can then spend for coffee. Or they hope for a fellow speculator who has spent dollars and Euros for coffee beans, rent and electricity to give them coffee in exchange for claims on numbers.

Greed is the fuel: everyone who already owns Bitcoins has an incentive to spread propaganda about Bitcoin. Propaganda has two components: substance and spin. Substance is a cognitively nutritious occupies our mind, induces us to say ‘Yes!’ and prevents us from seeing the truth as it is. Spin, on the other hand, feeding the greed and fueling the enthusiasm.

Substance is based on ineptitude of western central banks at reigniting the economies: hoping that monetarist policies that worked decades will miraculously work again. The real problem is that the human population more than doubled over the past 50 years, but the amount of land and natural resources has decreased. Things became a lot more competitive, and the same resources need to be shared by more people.

It’s hard for a politician to admit simple truths, it’s easier to print more money, spend most on your friends and supporters while channelling a little to the most gullible and least demanding among the voters. By the time their term’s over, someone else will be fixing the mess. Or maybe just continuing the downward spiral.

Spin is based on the mystery of technology. True, computers and internet are growing in importance, and that distributed ledgers are indeed cool if not particularly scalable. The crypto nature of Bitcoin is pure spin. It’s a magical trick of making things seem more impressive than they really are. To simplify it: not all numbers are valuable, only some with particularly fun properties. For example, prime numbers 7, 13 or 17 are valuable, while 4 or 6 aren’t: 4 can be expressed as 2*2 and 6 is equal to 2*3. And yes, as numbers grow, there are fewer and fewer prime numbers. But who cares?

Those who got in early enough could amass many claims valuable numbers for very little computation cost. But now, valuable and non-renewable energy is being burned off so that more useless numbers get “mined” as they become harder and harder to find. It’s not that the natural energy and human energy would be dedicated to something useful — it’s just wasted. But, there’s a metaphor of “mining” — making it seem that something of use is actually being done. Instead of all this crypto nonsense, one could just cap the number of “valuable” numbers to some fixed number and set a price at which they can be bought. It’s equivalent to paying money for energy needed to “mine” them. Oh, but that wouldn’t have enough substance to offset the spin! ;-)

Who’s paying for the energy? Criminals have put Bitcoin mining software on your computer, so if your computer is running slow or the battery getting drained quickly: maybe you are the one paying for someone else’s Bitcoins. It’s a burden on whole society.

I suggest that all those who happen to own claims on numbers to continue exchanging them with each other and to have plenty of fun. The US Department of Treasury Financial Crimes Enforcement Network doesn’t think there’s any problem whatsoever with this in their March 18 guidance (FIN-2013-G001). It’s somewhat unfortunate that miners are spending real electricity to “mine” Bitcoins (and possibly your own hard-earned dollars and Euros because it’s all happening on your computer) and pollute the air we all breathe when early birds have already picked all the low-hanging Bitcoins.

If you’re gullible (or speculatively greedy) enough to exchange anything of value for Bitcoins — all you get are claims on numbers — you’re not breaking the law. If you’re lucky enough to get something of value in exchange for a Bitcoin — go ahead. But if you’re buying Bitcoins for money and selling them for money — you should be working with someone who’s a licensed money transmitter.

It takes about 6 months for naive speculators to forget the previous Bitcoin’s collapse, and Bitcoin speculators get to make pretty good profit. The point is: value of Bitcoin is solely based on the demand for Bitcoin, and there’s plenty of wool being pulled over people’s eyes.

In financial markets, bulls make money, bears make money, but pigs get slaughtered. Don’t be a pig. Don’t be greedy. And if you’re a bull or a bear, stop speculating and taking advantage of others. Buying Bitcoins is just giving money to speculators and those who burned energy for no good. Accepting Bitcoins is doing work for or giving goods to those who speculated or burned energy for no good. Instead, go make something useful. Fix problems. Help people.

Beneath are three periods of Bitcoin history. It’s easy to fill in the blank: :-)

I recommend a few related articles:

Postscript:

As I predicted in this article that I posted on Nov 10, 2013, the bitcoin bubble popped in December 2013. As customary, bears sold in November, bulls in December or January, pigs got slaughtered. Here’s the full chart:

I was ridiculed widely. But I also had the article translated and printed in a European magazine. In retrospect, I would have written my article in a less tongue-in-cheeky tone.

I actually started writing my article during the previous bubble, in April 2013, but never finished it. Because of the beautifully repetitive nature of speculative market fractals, I had the opportunity to finish the article at end of 2013.

Alas, the cycle is complete, here we go again. With every year, the technology is getting better, but also more similar to what it’s purported to replace.