Bitcoin has broken the $10,000 barrier – and this run can go...

Bitcoin has broken the $10,000 barrier – and this run can go further | Dominic Frisby

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Few, beyond the most outlandish prognosticators, would have ever thought such a thing possible, even just a few months ago. But the internet cash system bitcoin has burst the psychological $10,000 barrier. As I write this, it is closing down on $11,000.

At the beginning of the decade the price of a bitcoin was barely a penny. It has been the greatest money-making opportunity any of us will see in our lifetime. A $100 bet in July 2010 is now $16m. If you were one of the libertarian geeks who got in close to the start back in 2009 and managed to hold on, you have made millions of times your money. It is up 1,000% this year alone. Bitcoin has created fortunes beyond anyone’s wildest dreams.

And yet it is also perhaps the greatest bubble in all human history. In terms of multiples from its starting price, bitcoin now dwarfs 17th-century Dutch tulip mania, the South Sea and Mississippi bubbles of the 18th century, railroads in the 19th century, US stocks in the 1920s, Japanese real estate in the 1980s, dotcom in the 90s … You get the point.

Bitcoin’s keenest advocates will say it is the digital gold standard on which money systems of the future will rest. Its sternest critics declare it an overhyped fad that will end in the same grave as Charles Ponzi.

Let me tell you something all bitcoin’s advocates have in common. They have invested. They have been persuaded by the story. They have used the technology and are familiar with it. They are talking their own book.

Its critics, meanwhile, have almost invariably not invested. Often they are cross with themselves for missing the opportunity. Most importantly of all, they have not experimented with the tech.

That’s what people don’t get. Bitcoin is a tech. Those who use it, love it. Those who don’t, dismiss it. It’s like parents not getting Snapchat. Using the tech creates the converts. Almost every criticism you will hear, from the claim that governments will shut it down to JP Morgan’s chief executive, Jamie Dimon, saying it’s “a fraud”, just shows a lack of familiarity with the tech.

Bitcoin graph

Critics tell you bitcoin relies on greater-fool theory – people only buy it because they think they’ll be able to sell it to somebody else at a higher price. But any kind of trading works on that basis. Who is the greater fool? The guy who participates in the greatest investment mania any of us will ever see in our lifetimes? Or the guy who misses out?

Bitcoin is not going away. If it was going to die, it would have died by now. It may experience an 80% correction, and all the naysayers will go: “I told you so.” But it has experienced five 80% corrections already in its eight-year life. Another 80% correction would be normal. The question is, will that 80% correction begin at $10,000, $11,000 or $100,000?

I’m not denying for a second that this is a speculative frenzy. Speculative frenzies do not end well. But my instinct says this run has further to go. The momentum is so strong. Institutional money is only just getting positioned. Bitcoin’s market cap is still small. So many people are declaring this a bubble – that, in itself, suggests further upside. It’s only when the last buyer is sucked in that the bubble pops.

We should also consider the ultimate cause of this bubble. We live in the age of bubbles because our debt-based monetary system is flawed.

Bitcoin is the first, and the biggest, “cryptocurrency” – a decentralised tradable digital asset. Whether it’s a bad investment is the $97bn question (literally, since that’s the current value of all bitcoins in existence). Bitcoin can only be used as a medium of exchange and in practice has been far more important for the dark economy than it has for most legitimate uses. The lack of any central authority makes bitcoin remarkably resilient to censorship, corruption – or regulation. That means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it’s hard (but not impossible) to trace a bitcoin transaction back to a physical person.

When the dotcom bubble burst in 2000, the reaction of central banks was to slash rates, loosen lending and, largely, ignore inflation – all in the name of reinflating the economy. Too much easy money gave rise to the US housing bubble that caused the global financial crisis in 2008. When that hit, central banks didn’t learn from their mistakes. They repeated them. Banks were bailed out, rates were slashed to their lowest levels in all recorded history, money was printed via quantitative easing. The system had been saved, we were told. No thought was given to the rampant asset-price inflation and wealth inequality their policies brought on.

Bitcoin was invented in reaction to all this. “Escape the arbitrary inflation risk of centrally managed currencies!” declared bitcoin’s inventor, Satoshi Nakamoto, as he introduced an early version.

Bitcoin caught a nerve. Computer coders and techies loved it because it solved a problem that had dogged them for decades – the problem of double-spending. Anarchists and libertarians loved it, while economists were fascinated by it, because here was a new system of non-government money. Speculators loved it because here was an entirely new asset class that keeps going up in value – there is no better advert for a speculative asset than a rising price. Entrepreneurs loved it because of the possibilities it suddenly opened up. Black marketeers loved it because here, finally, was an anonymous system of cash with which you could buy and sell illegal goods. It caught the zeitgeist.

If central banks had not debased our money in the way that they have, nobody would care about bitcoin. The narrative that has created this bubble could never taken hold in the way that it did. But now it has. The result is this mania. A bubble bigger than anything since tulips – only this bubble has utility. It’s a bubble that’s likely to get bigger. And when it pops, there will be carnage. There always is.

On the one hand, the enormous wealth bitcoin is creating is starting to rebalance the intergenerational wealth divide. It’s the under 40s, mostly, who use bitcoin and its related technologies. But on the other, these kids don’t remember dotcom. They don’t know what happens when it goes wrong.

Dominic Frisby is the author of Bitcoin: the Future of Money?

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