Bitcoin Mania Parabolic…”unfortunately this wild ride has all the hallmarks of a classic popular speculative mania. And those all end badly, totally collapsing.”
By: Adam Hamilton, CPA
GoldSeek.com
Friday, 8 December 2017
Bitcoin’s meteoric skyrocketing this year has been astonishing, captivating traders across the globe. This once-obscure cryptocurrency has exploded into the world’s hottest market. With fortunes being won on paper, everyone is talking about bitcoin. But with its price shooting parabolic, unfortunately this wild ride has all the hallmarks of a classic popular speculative mania. And those all end badly, totally collapsing.
In the annals of financial-market history, the word “mania” is never used lightly. These are very-rare events where some market blasts higher so radically that it captures the popular imagination. The dictionary definitions of mania include “an excessively intense enthusiasm, interest, or desire” and “a pathological state characterized by euphoric mood, excessive activity or talkativeness, and impaired judgment”.
The seminal book on popular speculative manias is Charles Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds”, first published way back in 1841. Manias are certainly nothing new, they have been periodically erupting for many centuries if not millennia. Mackay’s incredible work is one of the few must-read books for every investor. I’ve read it several times in my life, starting back in college.
Mackay’s title is brilliant, perfectly summing up manias. They are truly extraordinary popular delusions, illustrating the madness of crowds. Objectively, this year’s extreme bitcoin action definitely fits that bill. I say this as a lifelong student of the markets. Like the objects of lust in past popular manias, bitcoin and its underlying blockchain technology have real potential to change the world. But that doesn’t justify its price.
As a techie, I started getting interested in bitcoin about 5 years ago, well after its birth in January 2009. It was intriguing as the world’s first decentralized digital currency, an Information Age end run around the established government fiat-money systems relentlessly being inflated away by central banks. Bitcoin’s never-unmasked creator going by Satoshi Nakamoto was a marketing genius, wrapping bitcoin in gold terminology.
The “coin” suffix implied bitcoin is money, rather than a virtual fiction with artificial scarcity. And it used a novel distributed-ledger technology called blockchain. That is a record of all bitcoin transactions that is broadcast and validated by the entire bitcoin network. This ensures that bitcoins can be transferred with no counterparty risk, trust is irrelevant. Maintaining the blockchain is called “mining”, again bringing gold to mind.
The countless computers all over the world participating in recordkeeping for bitcoin’s blockchain work to simultaneously solve complex cryptographic problems, or hashes. This mining guarantees that all new bitcoin transactions are legitimate. While it is computationally-intensive which requires much electricity, bitcoin ingeniously awards participating miners with newly-created bitcoins. That’s a heck of an incentive today!
Somewhat like gold, the bitcoin supply grows at slow and ever-decreasing fixed rates. Today there are around 16.7m bitcoins in circulation. 12.5 new ones are created every 10 minutes and distributed to the miners maintaining the blockchain. That supply-growth rate will be gradually halved again and again until the bitcoin supply hits its hard-coded maximum of 21m bitcoins after 2110. So bitcoin’s supply is artificially limited.
Repurposing old computers to mining is what sparked my initial interest in bitcoin. I run a small financial-research company where we must periodically replace our high-end computers. So I investigated putting some of our old put-out-to-pasture ones to work mining bitcoins, but at the time the electricity cost well exceeded the resulting bitcoins’ value. Back then bitcoin mining didn’t require specialized custom-made rigs.
The Rest…HERE
