Crypto

Is Bitcoin the same speculation as any other?

A symptom of hyper-liquidity, Bitcoin is the most talked about subject of current speculation, but its fate remains uncertain. His fans the dream of a universal currency replacing state currencies and commercial banks, which, in their opinion, should stabilize its exchange rate.

In the meantime, we are far from it! Its use as a means of payment is minimal, mainly affecting several countries experiencing a monetary and financial crisis or abandoning their monetary sovereignty. Bitcoin is essentially a “speculative asset” and there is no reason to believe that it can get out of it.

History knows many speculative episodes. One concerning bitcoins is similar and different from two of them: the Tulomania of 1637 in the Netherlands and the Carlo Ponzi scam in 1920 in the United States.

The usual point is to look for profit that exceeds the average value of the current profitability. Ponzi promised over 50% in three months. In the case of the Madoff fraud, exposed in 2008, based on the Ponzi scheme, whoever lends funds to the fraudster believes he has a privileged relationship that allows him to earn much higher returns than the market currently offers. He told everyone that he does not accept anyone else, but makes an exception. The client does not know that his funds are not invested, but are used to reward previous subscribers.

There are also quirks and convictions to participate in social change, both in terms of tulips and bitcoins.

The difference between Bitcoin, Tulip and Ponzi scheme is mainly related to the purpose of the investment. In the case of Ponzi, this is a fictitious investment because there was no real activity associated with it. Bank created by John Lowe in the 18th century.e century had to count on future income from the colonial exploitation of Louisiana. Bitcoin is called “virtual” gold.

But there is a clear difference between material material, which can be industrial or artisanal, and the created bitcoin units. ex nihilo and is distributed as an award for a computer computing competition. The latter are not based on any tangible assets, but on the promise that their value will rise and their acceptance will become ubiquitous. Faith is important. The tulip bow was in the middle position as the fashion effect exaggerated its usefulness.

The Ponzi scheme needs to increase the number of members and related funds to reward first-timers and attract new ones. In the case of bitcoins like tulips, the increase in the number of people willing to buy them and the amount they are willing to spend puts upward pressure on prices. But in a market where the buyer is willing to pay dearly, the price can skyrocket unnecessarily due to the large number of bidders.

This is why bitcoin speculation can be compared to tulip speculation, although it can be viewed as commodities, not only rare but almost unique in their specificity. Although each bitcoin looks like all other bitcoins as it is an industrially standardized and purely digital commodity.

When Holland gave way to “tulip mania”

One of the first modern crises of overproduction still seems anecdotal: it is played out around the production and marketing of tulip bulbs. Introduced to Europe a century earlier, these bulbs flourished in the 1630s. Most of them came from the Eastern Mediterranean and passed through Amsterdam. Tulips are highly prized by a population that is enthusiastic about novelty, and for monarchs they are a sign of their status.

Between 1634 and 1637, demand grew so rapidly that prices rose exponentially. The gains were such that they encouraged suppliers to produce new tulip models themselves (sold even more expensive) by selecting and modifying the original varieties. In 1637, prices reached such a high level (the price was trading for about the amount that today would correspond to 45,000 current euros) that demand fell. Prices fell, causing many tulip suppliers to go bankrupt. Those who had bulbs left after 1637 could only plant them in their own garden.

Why Bitcoin is still growing

Watching the wide swings in the price of bitcoin, one might wonder why so far its decline has been followed by a recovery. Will it be the same after the recent drop of almost 50%? If so, how long will it take? The yo-yos of his course today mark the difference from the Ponzi scheme and tulip mania, which ended in a final fall.

Bitcoin has a much longer time frame and is known to this day trend increasing, alternating with periodic relapses (14 cases exceed 30% in the period from 2012 to 2021 and reach 82% in 2013, 86% in 2016, 83% in 2018).

How to explain course repetitions? Several reasons can be put forward.

The first, technical one, is that the fall is restrained by the impossibility of almost instantly realizing all sell requests, which limits the speed and depth of the fall. Added to this is the fact that transactions are processed not in the order in which they are received, but with the priority of transactions with which issuers associate the highest fees. The percentage of the commission, decreasing in accordance with the amount, punishes the “little ones”, who therefore lose proportionally much more when the price falls than those who can realize their profits first.

Confidence in the future of bitcoin is based on a speculative perspective and libertarian ideology supporting the project to eliminate traditional currencies.

The second reason has to do with the high trust in bitcoin by those who hold it, which means that the vagaries of its price do not radically affect their faith in its future. This confidence is based on a purely speculative perspective and libertarian ideology supporting the project to eliminate traditional currencies. Articles on sites promoting bitcoin argued that “momentary” losses must be offset by pride in contributing to the technological and financial revolution!

The third reason may be related to the ability of certain participants to enrich themselves by changing its price. In fact, bitcoins are owned by a very limited number of players, who are called “whales”: 2% of accounts now contain 95% of bitcoins in circulation. Most bought them when their price was much lower than the current price.

Even when several agents intervene in the market, it is enough that those who wish to buy bitcoins (like tulips in the past) are willing to pay dearly to raise their price. When new entrants enter the market or those who own them are willing to buy more, prices rise unless those who hold them bring them back to the market proportionately. However, the creation of new bitcoins is decreasing (initially 50 bitcoins every ten minutes, divided by two every four years until it equals zero).

It should be noted here that the number of bitcoin holders would increase from just over three million at the beginning of 2015 to over 54 million at the end of 2020. Today that number will reach 100 million.

Another important element for comparing bitcoin and past speculation is what the consequences of a collapse in its price will be in all financial markets. The collapse of the Ponzi scheme and the fall in tulip prices had no discernible effect on the real economy, except for the ruin of the few who allowed themselves to be fooled: 40,000 depositors were eaten by Ponzi, 40,000 also by Madoff. Much less and much more than the fall of Law banknotes, from which one tenth of the population of France suffered. and we saw in 2008 substandardloans in a specific and localized sector very quickly pollute the entire financial system.

Until now, the bitcoin market has remained quite distant from it. The main players in the sector are resisting its integration. But the number of organizations entering the bitcoin market has increased in the spring of 2021. If this continues, the risk of destabilizing the system will become significant as regards substandard

However, in the coming months, especially after monetary and financial authorities (Chinese and American) announce interventions to tighten control, the game may calm down or even reverse the trend. The energy intensity of the bitcoin protocol, as well as its systematic use by ransomware (extortionist) may also be taken into account by the authorities to restrict its use or even prohibit it.

The widely explored possibility of creating digital currencies by central banks will also play a role in the future of bitcoin.

Jean-Michel Servet Professor at the Higher Institute for International Research and Development (Geneva), specializing in foreign exchange transactions.

Jean-Paul Delahaye mathematician and computer scientist, specialist in cryptographic currencies, professor emeritus at the University of Lille.one.

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