Bitcoin boom bust
Posted On 25.10.1969
The volatile rise-and-fall of Bitcoin has prompted lots of stories explaining why the online virtual currency is a classic bubble. Many compare it to tulip bitcoin boom bust in 17th century Holland, where prices of rare tulip bulbs soared to absurd heights and then crashed, ruining the speculative investors who had bought them.
But the Bitcoin phenomenon is more than a bubble. The scale of the recent boom-and-bust has been staggering indeed. 100, as one of the exchanges where Bitcoins are traded closed temporarily. Such monumental appreciation and volatility are clearly the result of speculation — people buying the online currency just because they think its value will rise, not because they want to use it to purchase goods and services. But Bitcoins’ gains are not the result of speculation alone. They partly reflect the fact that the Bitcoin system is much better designed than previous online currencies.
The technicalities of the Bitcoin system are complex, but to make this online currency more successful than previous versions, the designers overcame two key challenges. Second, they strictly controlled the supply of Bitcoins outstanding — thereby saving it from the disastrous fate of, for example, the paper currency known as assignats that were issued during the later stages of the French Revolution. Initially, assignats were backed by land and buildings that had been seized from the church. Unlike assignats, Bitcoins have no backing at all. What they do have, however — and what has turned out to be more important — is a formula limiting the growth of the supply outstanding.
Over time the formula for the Bitcoin supply actually reduces the amount of new currency added to the system. And the new Bitcoins are not created by fiat, but in exchange for valuable labor: they are paid to computer hobbyists who monitor the Bitcoin system to keep it running and prevent counterfeiting. Critics have argued that a currency like Bitcoins would be inherently deflationary because the supply can’t be adjusted in response to economic conditions. But there’s a strong argument that the appreciation and volatility of all these currencies reflect reasonable concerns about the global economy and banking system. Of course, real countries do have massive wealth backing their currencies and their bonds, as well as the police power to arrest counterfeiters. And, as I’ve argued in an earlier article, the U.
Could these online currencies ever reach a level at which they alter or obstruct government policy? The Internet will almost certainly offer access to a growing number of currencies in one form or another that are beyond national control. Fed would be forced to change course. Governments will fight back, no doubt. But virtual currencies will be no easier to control than Facebook. Stopping the movement of capital will be possible only if countries are willing to impose harsh taxes and capital controls. Once alternative currencies are frictionlessly available on the Internet, every laptop will become its own Cayman Islands.