Type "bitcoin bubble" into a search engine and you will come up with 15 million hits. No wonder. The trading chart of the electronic currency – backed by nothing, not gold, not a central bank, absolutely nothing – looked like the Eiffel Tower viewed from ground level before Christmas. The rises were steep, though jagged, before going nearly vertical and soaring into the clouds: a truly awesome sight.
At the start of 2017, bitcoin traded at US$1,000. By September, the price had gone to US$4,000, by mid-December almost US$20,000, giving it a market value of US$320-billion, at which point the chart looked like the Eiffel Tower viewed from the top. Down went bitcoin, reaching US$10,000 by late January. It traded around that level on Friday.
A plunge to US$1,000 or lower is not out of the question. Almost every commodity that has seen such sharp climbs has seen equally sharp falls.
Bitcoin's performance since its peak seems prima facie evidence that the cryptocurrency bubble is bursting. More than a few analysts think bitcoin is utterly doomed. BCA Research's bitcoin price target is zero – within ten years, that is, in the ultimate hedge-your-bets call. But what might finally kill it off? The fatal bullet may not be what you think.
Bitcoin's core defenders are financial libertarians who are convinced fiat currencies – those with no intrinsic value whose "legal tender" status is set by government decree – are the ones that are doomed, not the cryptocurrencies. The true believers insist bitcoin and its ilk will eventually replace all currencies (giving them a theoretical value of global gross domestic product), because they are immune to inflationary whims.
Supply will be limited to 21 million bitcoins, each one underpinned by the allegedly tamper-proof blockchain technology; fiat currencies might not be worth the paper they're printed on because governments can mill out all the money they want, leading to potential Weimar-style hyperinflation. Abolish government-controlled money and your savings will be safe, or so they argue.
One flaw in the argument is that the market is already bursting with competitors – well over 1,000 variations are pinging around cyberspace and new initial coin offerings (ICOs) are coming every day. According to coinmarketcap.com, the top 100 cryptocurrencies now have a collective market value of about US$480-billion (the biggies, in order, were bitcoin, ethereum, ripple, bitcoin cash and litecoin).
There are rumours that the tech giants, such as Amazon, will use their secure global platforms to launch their own currencies. Some of them are bizarre. Dentacoin – you guessed it – is used to pay dentists. Kodak, the ultimate dinosaur company, saw its shares triple in January when it said KodakCoin would soon emerge from the darkroom. Why not a currency for dope heads? Oh wait, one is already wafting around the market. PotCoin is best known for sponsoring Dennis Rodman's trip to North Korea.
Still, excess supply may not be enough to vaporize bitcoin and its rivals. What could do the trick, however, is exploding the myth that bitcoin is money, as opposed to a funny commodity that you can't pump, refine, grow or dig out of the ground. Sorry, bitcoin investors; money is not money unless you can pay taxes with it. Try using bitcoin to settle your tax liabilities and see how far you get.
There are a lot of reasons why civilizations have used money historically. It was easier for farmers to pay stonemasons or iron smiths with coins with the king or emperor's face stamped on it than by paying with bushels of apples or corn. Another key reason physical money appeared was so that kings and emperors could collect tax to pay their armies and guards and finance wars.
No government can force the people to use the national currency for private payments – two parties can use Canadian Tire money if they wish – but it can force the people to use the national currency to meet the tax obligations that it imposes. "The tax (and the corresponding ability to enforce payment) is what gives an otherwise worthless piece of paper with pictures of dead presidents on it its value," market analyst Marshall Auerback said in a recent AlterNet report. "Value is imparted by requiring it to fulfill a tax obligation."
You could argue that cryptocurrencies will become so popular that governments will have to accept them as money. But why would they? Doing so would only inflate the bubble to grotesque proportions while wrecking the whole philosophy underpinning cryptocurrencies, which is that they're supposed to be immune to the political whims of vote-buying politicians. No sane government would give up the monopoly over its own currency.
In the end, what is propping up bitcoin cannot rationally be the belief that governments will bestow it with legal-tender status.
Instead, Bitcoin fulfills the strongest human urge, which is to get something for nothing. Bitcoin initially traded, in 2009, at well less than a cent. It's had the greatest run of any investment in history. Every decade has had its bubble, from dotcom stocks to oil. Bitcoin is merely the latest.
Eric Reguly