The Economist: 'What if the bitcoin bubble bursts?'

calendar iconJun 26, 2017


To bitcoin, or not to bitcoin? That seems to be the question on the pun-happy headlines of payment related journals the world over. Bitcoin is making waves for its title of the world's first decentralised digital currency system, released anonymously in 2009 by Satoshi Nakamoto (pseudonym), it grants the power of bookkeeping to the bitcoin users themselves. How does it work? Glad you asked. 

The purpose of Bitcoin is to 'do away with a centralised system'. Instead of a centralised authority keeping track of the many payments coming in and out simultaneously, Bitcoin relies on peer-to-peer computer network made up of its users’ machines. As more users join and conduct bitcoin transactions, the digital file 'ledger' of names and balances grows, along with the value of bitcoins. 'Miners' or users who answer mathematical problems can earn extra bitcoins (a part of the process which is said to end within 15 years), and in doing so, affect the order of transactions for the ledger, thus decentralising control by automating tracking.  

But will it last? Will it fail? What does this mean for other payment options? Only time will tell. What we do know is that banks will be keeping a close eye on this one. 

Is the latest frenzy like tulipmania, a gold rush or the dotcom boom?

MARKETS frequently froth and bubble, but the boom in bitcoin, a digital currency, is extraordinary. Although its price is down from an all-time high of $2,420 on May 24th, it has more than doubled in just two months. Anyone clever or lucky enough to have bought $1,000 of bitcoins in July 2010, when the price stood at $0.05, would now have a stash worth $46m. Other cryptocurrencies have soared, too, giving them a collective market value of about $80bn.

Ascents this steep are rarely sustainable. More often than not, the word “bitcoin” now comes attached to the word “bubble”. But the question of what has driven up the price is important. Is this just a speculative mania, or is it evidence that bitcoin is taking on a more substantial role as a medium of exchange or a store of value? Put another way, is bitcoin like a tulip, gold or the dollar—or is it something else entirely?

Last Updated: Jul 27, 2017