Are we in Cryptocurrency Bubble ?

In 2008, a mysterious group of geeks proposed a digital currency which we know as Bitcoin today but what most of us do not know that there are 802 other cryptocurrencies at the time of writing and there is definitely a cryptocurrency bubble when we look at the online marketplaces where theses crypto-coins and currencies or commodities are being traded and the mushrooming of mining farms.

Unlimited Supply of Bitcoin 

Most common business model in Cryptocurrency game has become to develop a Blockchain, set up mining farm, and list the currency on different cryptocurrency-exchanges, to be exchanged with Bitcoin. It violates the primary reason for Bitcoin by its mysterious founders, to create a currency or coin with limited supply. Definitely​ there are limitations in place in the process of creation of new Bitcoins but there is no limitation in its exchange with other cryptocurrencies. In essence, Bitcoin has become MEFO bills. So what exactly is happening in the world of Cryptocurrency and how it have evolved into a bubble?

Before moving to the argument, I am quoting celebrated author David Sarna”

In a perfect world, markets fluctuate exclusively on the basis of honest variations in supply and demand and reflect perfect information. Everyone has access to exactly the same information.

Unfortunately, the world is not perfect. Seekers of easy money try to gain an unfair advantage by:

  1. Manipulating supply and demand to their benefit.
  2. Taking advantage of information unavailable to the market and then using this secret information to profit so long as the market supply and demand have not yet reflected their inside information.

Information and wrong information, both are very profitable and beneficial to those who know how to use it properly. Primary objective to create a digital currency was to cater the need of “Trust” in post-financial crisis world of finance and commerce where payments and commerce are moving rapidly over internet. In the words of never-seen-creators of Bitcoin, “What is needed is an electronic payment system based on cryptographic proof instead of trust,  allowing any two willing parties to transact directly with each other without the need for a trusted  third party.” Soon, after its creation, the Bitcoin started to loose trust on itself although system which is now known as Blockchain, have gained more trust.

Most distrustful aspect is price movements of Bitcoin.  According to the Wikipedia, 

In early April 2013, the price per bitcoin dropped from $266 to around $50 and then rose to around $100. Over two weeks starting late June 2013 the price dropped steadily to $70. The price began to recover, peaking once again on 1 October at $140. On 2 October, The Silk Road was seized by the FBI. This seizure caused a flash crash to $110. The price quickly rebounded, returning to $200 several weeks later. The latest run went from $200 on 3 November to $900 on 18 November.  Bitcoin passed US$1,000 on 28 November 2013 at Mt. Gox.

The movements of price, the activities where Bitcoins have been used clearly show us that none of the stated purpose have become the “primary” markets, similar to the Tulip Mania or Housing Bubble where two thousand times more money was betting on housing market compared to being invested into construction of houses in the name of CDOs and MBSs.

Today, Digital Coin trading stock markets have mushroomed and already started to be busted. The story is similar to the first stock market.

 First Stock Exchange The Amsterdam Stock Exchange, or bourse, was founded in September 1602 within six months of the company ’ s formation and was an integral component to its success; the exchange grew to an organization of 50,000 civilian employees, with a private army of 40 warships, 20,000 sailors, and 10,000 soldiers and a mind – blowing dividend fl  ow. The whole of Holland was revitalized. With a market for its stocks and bonds, the Dutch East India Company became probably the most powerful business in the history of the world. It became, for all intents and purposes, a state within a state. The Dutch East India Company remained an important trading concern for almost two centuries, paying an 18 percent annual dividend for almost 200 years. In its declining years in the late eighteenth century, it was referred to derisively as Vergaan Onder Corruptie, which translates as  “ Perished by Corruption. ”  The VOC became bankrupt and was formally dissolved in 1800. Soon after the founding of the Amsterdam Stock Exchange, other companies began to raise money on it and to list their shares for trading. Market manipulation and stock fraud began to appear not long afterward.
The tulip bulb scandal in 1636 and 1637 is perhaps the first well documented securities manipulation fraud, but of course it was by no means the last. Essentially, the rapid expansion of commerce in the Netherlands brought about gambling on profit speculation. According to Herbert H. Rowan, during the tulip bulb scandal,   . . .

The bulbs of tulips and hyacinths  . . .  had become the modish flowers of the day in their myriad new varieties. Rapidly escalating prices spurred the gambling instincts of all sorts of people, especially in the district of Haarlem. In 1637, after prices had soared to fantastic heights, the speculative castle in the sky collapsed suddenly. For those who lost fortunes, there was tragedy.

Geoffrey Cotterell writes:

Bulbs were bought and sold and resold dozens of times. They were bought and sold unseen.  . . .  One Amsterdamer made 60,000 guilders in four months, when his annual salary as a burgomaster [mayor] was only 500.  . . .  The fever kept on gett ing wilder and wilder until suddenly at the beginning of 1637, the market cracked. In a few days hundreds were ruined. The losses were such that the whole credit system, not merely for tulips, was endangered.

The basis concept of cryptocurrency was to create Limited currency or coins. So what the other creators of 801 cryptocurrencies are doing that they are creating more and more cryptocurrencies with different names and titles with single objective which is to exchange with Bitcoin, thus the nature of all these cryptocurrencies has become same like Tulips bulbs with Unlimited supply.

Other major factor is ignorance of primary objectives, which were Trust building, speedy, secure and timeless Remittance. Today, global remittance market is about $442 billion annually but not even ten percent the transaction being conducted through Blockchains despite the fact that there “Market Cap has crossed 29 billion dollars according to it clearly shows that the focus of the Cryptocurrency is not to develop the primary market but to speculate until the bubble bursts. For those who are betting in these coins markets blindly, just remember none of these coins are regulated and legalized, so after the crash, governments won’t be able to help.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s