If it looks like a bub­ble and acts like a bub­ble . . .

Sunday Times - - BUSINESS TIMES - Whit­field wishes he’d bought 100 bit­coin at $1 a pop when told to by a richer friend in 2010 Bruce Whit­field

The old say­ing, “Bet­ter to re­main silent and be thought a fool, than to speak and re­move all doubt,” is the ever-present curse of the columnist. But what the heck: Bit­coin’s a bub­ble. There, I’ve said it.

And while I’m at it, it’s not a cur­rency. It’s not an in­vest­ment, ei­ther. At best it’s an in­vis­i­ble, in­tan­gi­ble com­mod­ity.

Yet ev­ery­one from par­ents at the school gate to hair­dressers are talk­ing about the phe­nom­e­nal growth of a dig­i­tal cre­ation whose ori­gin can­not be tracked, whose mas­ter­mind is un­known and about which we un­der­stand less than the ori­gins of life it­self.

The blockchain tech­nol­ogy that un­der­pins it is bril­liant and will likely make fu­ture fi­nan­cial trans­ac­tions faster, more se­cure and cheaper to ex­e­cute. There are more than 1 320 crypto-cur­ren­cies in the world — of which bit­coin is but one.

Bit­coin is emit­ting the clas­sic sig­nals that sug­gest it’s a bub­ble: it took nearly five years for it to move from zero to $1 000 (R13 600), an­other three and a half to get to $2 000 ear­lier this year, then it hit $3 000 in 23 days. Two months later it was at $4 000 and took two more to get to $5 000.

Since then, each thou­sand-dol­lar in­cre­ment has taken two weeks or less. It was at $6 000 in eight days, $7 000 13 days later and within 14 days hit $8 000. That’s when the hype went strato­spheric.

Nine days later it hit $9 000 and this week, just two days af­ter that, it hit $10 000, then broke through $11 000 less than 12 hours later, on Wed­nes­day, be­fore beat­ing a hasty 15% re­treat. Long-suf­fer­ing early adopters are pa­per-rich and stand to re­alise con­sid­er­able value if they con­vert their bit­coin into func­tional cur­rency. The problem is the late adopters fran­ti­cally try­ing to get on the bus.

Why has the price of bit­coin kept go­ing up? Sim­ple: de­mand. There is a lim­ited sup­ply of bit­coins and be­cause there is a frenzy to be part of the mirac­u­lous growth, old­fash­ioned greed means that peo­ple keep buy­ing be­cause the price keeps go­ing up. Un­til it doesn’t.

The av­er­age real re­turn on bit­coin since 2010 is more than 400% a year. The gains make the dot­com bub­ble look like child’s play — although the Bank of Eng­land this week played down con­cerns that a bit­coin melt­down could have a con­ta­gion ef­fect. It’s just too small.

Bit­coin has all the trap­pings of the 1700s’ tulip mania in the Nether­lands — the sub­ject of a new movie about how or­di­nary Dutch cit­i­zens traded in tulip bulbs. There was no ra­tio­nale to the fren­zied spec­u­la­tion and thou­sands were ru­ined when the col­lapse came.

If you are tempted, you are in good com­pany. Sir Isaac New­ton in­vested — like a great many peo­ple — in the 1720s in the South Sea Com­pany, which was granted a mo­nop­oly on trade with South Amer­ica in ex­change for as­sum­ing Eng­land’s war debt. Sen­si­bly, he sold out and pock­eted a de­cent for­tune be­fore the shares went strato­spheric. He watched his still-in­vested com­pa­tri­ots be­com­ing ever richer and, weeks be­fore the col­lapse of the firm, he rein­vested — only to see it evap­o­rate be­fore his eyes as the bub­ble burst. One of the smartest peo­ple ever to walk the earth was ru­ined.

New­ton — the guy who iden­ti­fied grav­i­ta­tional force — un­der­stood that what goes up must come down.

And still he in­vested.

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