Bitcoin starting to look like a bubble

Ever since the dot-com and housing bubbles popped in 2000 and 2008, spotting bubbles has become a national obsession. Investors have spotted bubbles in bonds, credit, equities, gold — you name it — over the last several years.

I wouldn’t use the B-word to describe any of those investments — yet. In fact, I wouldn’t even nominate any of them for Most Likely to Bubble Over. I would give that distinction to a certain cryptocurrency that is quickly making its name and fortune: Bitcoin.

Bitcoin has all the attributes of a bubble in the making. First, it’s radically new. It’s a digital payment system that allows users anywhere in the world to transact directly without interference from intermediaries, governments, regulators or central banks — at least for now. Transactions are administered by a decentralised network of computers.

In his book about the 17thcentury tulip bubble in Holland, Tulipmania, British journalist Mike Dash points out, “It is impossible to comprehend the tulip mania without understanding just how different tulips were from every other flower known to horticulturists in the 17th century.” The same could be said about digital currency today.

Second, Bitcoin is shrouded in secrecy. Buyers and sellers of Bitcoin can trade anonymously, which makes the digital currency a favourite of criminals and hackers demanding ransom. Its origins are shrouded in mystery. Its creator goes by the name of Satoshi Nakamoto, but it’s unclear who that person is or if it’s even one person. That, too, is reminiscent of another bubble. At the height of England’s South Sea Bubble in 1720, one company floated shares “for carrying-on an undertaking of great advantage but no one to know what it is.” Of course, that didn’t stop investors from throwing money at the company.

Third, Bitcoin has no value other than what a buyer is willing to pay for it, which makes it susceptible to the argument that underlies all bubbles. Namely, that any price is appropriate.