THE RISE the cryptocurrency has been driven by heavy demand and limited supply.
In particular, there has apparently been burgeoning demand for Bitcoin from Japanese investors as well as institutional investors. Such investors tend to have longer-term horizons, and they are more likely to wait patiently for their investments to gain in value.
Bitcoin hit an all-time high of US$4,483.55 earlier this week before dropping below the US$4,000 mark by mid-week.
By holding onto their Bitcoin, the amount in circulation will decrease and this should, in turn, raise the value of Bitcoin.
Now, let’s extend this train of thought further. If more long-term investors snap up Bitcoin on the expectation that it will increase in value, its utility as a mechanism for facilitating trade will surely be affected. There arguably won’t be enough Bitcoin for transactions in the real economy. It will gradually begin to exist in a bubble as its functionality in the real word facing erosion.
If Bitcoin has no functionality or utility, the bubble will burst and the value of Bitcoin may crash.
How likely is this scenario? What will happen in the aftermath?
History Repeating Itself?
If you experienced the dotcom bubble around the turn of the century, there are insights there as to what might happen with Bitcoin.
If you recall, the dotcom bubble was fuelled by the emergence of the internet. There was massive speculation over the establishment of businesses around the functionality and utility of the internet. A plethora of internet-based companies, referred to as dotcoms, was founded around the world. Money was thrown at companies that had no earnings and founders became very rich. This enticed others to set up dotcoms.
However, between 2000 and 2002, the bubble burst. Many internet-based companies failed and were shut down. In retrospect, there was an absence of understanding on how internet businesses could be monetised.
A few firms survived, including the likes of Cisco, eBay and Amazon. What the bursting of the bubble did was get rid of the fly-by-night companies. The stronger companies, with more sustainable business models survived even if earnings were barely a flickering light at the end of a long tunnel at the time.
Amazon is probably the most prominent survivor, but even now profit margins remain wafer thin for its business.
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One common thread that ties the dotcom bubble with the current cryptocurrency craze is that no one knows what the future holds for cryptocurrencies. As was the case two decades ago, the fly-by-night elements associated with cryptocurrencies may need to be weeded out before the space can successfully transition to the next phase.
And after that, it may take a long time to gain universal acceptance. Growing pains are part and parcel of technological disruption.
The internet decentralised the dissemination of information and authorities have been trying unsuccessfully so far to rein that in.
Similarly, you would expect the decentralised nature of most cryptocurrencies leaves the gate open for all sorts of manipulation by parties that want to see them fail.
Giving the power over the issue of money to the people is anathema for governments, central banks, banks and corporates.
This could ultimately lead to the failure of decentralised cryptocurrencies like Bitcoin. Their place may be taken by cryptocurrencies where there is some sort of central control. These would be more palatable to authorities.
However, one thing that is likely to survive even if cryptocurrencies fail is blockchain. A broad-based online ledger which everyone has access to, where cheating and other forms of roguery are soon found out, it should have many applications across industries. It will cut off the inefficiencies related to multiple points where records have to be kept.
You know blockchain will survive because the governments, central banks, banks and corporates are all excited about it.
With blockchain in place, there can be no disputes. Take the example of the recent Lee family public fracas. If Mr Lee Kuan Yew had used blockchain when he approved the many versions of his will, there would have been nothing to dispute. The ledger would have told the truth.
Thus It Was Unboxed by One-Five-Four Analytics presents alternative angles to current events. Reach us at email@example.com
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