Bitcoin's Investment Mania: Is This Time Different?

Bitcoin and other cryptocurrencies have been receiving intense media coverage, prompting many investors to wonder whether these new types of electronic money are worth investing in. The price of Bitcoin has skyrocketed in recent years, with a single Bitcoin valued at over $17,000 at its peak in 2017, up from about $1,000 at the start of that year. This dramatic increase in value has led some to compare Bitcoin to previous investment manias such as the Dutch Tulip Mania in the 1600s, the tech bubble of the late 1990s, and the real estate bubble that led to the 2008 subprime mortgage crisis. However, others argue that Bitcoin is different from these past examples due to its purely digital and decentralized nature, as well as its potential to become a widely accepted form of payment in the future. So, is the Bitcoin investment mania different?

Bitcoin's value and volatility

Bitcoin is considered a volatile asset. Its value is highly unpredictable, often rising or falling by thousands of dollars within a single day.

Bitcoin's volatility is influenced by several factors. Firstly, like most commodities, its price is heavily influenced by supply and demand. Bitcoin has a limited supply of 21 million coins, and its value is expected to increase as the circulating supply approaches this limit. Secondly, media outlets, influencers, industry moguls, and well-known cryptocurrency fans create investor concerns, leading to price fluctuations. Thirdly, investor actions play a role in Bitcoin's volatility. Large investors, known as "Bitcoin whales", can influence market value by liquidating their holdings, potentially causing a panic sell-off and a significant drop in prices. Finally, government regulations and tax stances can also impact Bitcoin's price. For example, China's ban on cryptocurrency transactions in 2021 led to a drop in Bitcoin's price.

Speculation is a significant factor in Bitcoin's volatility. Crypto investors bet on Bitcoin's price movements to make profits, causing sudden price increases or decreases. This speculation is driven by the belief that Bitcoin will become the currency of the future, as well as its limited supply and decentralised nature.

Bitcoin's value is also derived from its decentralised network. There is no central authority or bank that can intervene in the market, which proponents argue makes Bitcoin a distortion-free market. However, this lack of central control also means that Bitcoin's price is highly sensitive to news and market sentiment.

While Bitcoin's volatility can present enormous opportunities for investors, it also carries significant risks. As a relatively new asset class, Bitcoin is still in the price discovery phase, and its long-term value remains uncertain.

Bitcoin as a speculative investment

Bitcoin and other cryptocurrencies have been the subject of intense media coverage, prompting many investors to wonder whether these new types of electronic money deserve a place in their portfolios.

Bitcoin is a purely digital currency that can be transferred using a global peer-to-peer network. It is protected by robust cryptographic techniques, and users can trade any fraction of a bitcoin. Money can be sent from anywhere and at any time.

Bitcoin has experienced dramatic price changes, sometimes gaining or losing more than 40% in price in just a month or two. In 2017, the value of a bitcoin at the start of the year was about $1,000, and by December, it had hit its highest point to date of more than $17,000.

The volatility is understandable because people are still trying to figure out what Bitcoin is and what value it has. When you're in these early phases, it's natural for there to be a rush of people investing, followed by a dip, and then another rush.

Some people invest in Bitcoin because they believe it could be the currency of the future. Others are attracted to its decentralised nature and the fact that it stands outside the global financial system. Still, others see it as a speculative investment, hoping to make a profit by buying when the price is low and selling when the price is high.

However, it's important to remember that Bitcoin is a high-risk investment. Its value is extremely volatile, and there is no guarantee that it will continue to increase. As with any investment, it's essential to do your research and understand the risks involved before deciding whether to invest in Bitcoin.

Bitcoin's future as a currency

Bitcoin is a purely digital currency, transferred using a global peer-to-peer network. It is a decentralised virtual currency, not backed by the central bank of any country. It is also not issued by a central bank, and no regulator or nation-state stands behind it. Instead, it is stored in a digital wallet, and transactions are recorded on a public ledger called a blockchain.

Bitcoin's value has always fluctuated, but it has skyrocketed in recent years. In 2017, it was worth around $1,000, and in 2021, it hit a high of $57,000. This volatility is understandable, as Bhaskar Chakravorti, the senior associate dean for international business and finance at the Fletcher School, explains: "we're in the very early phases of a phenomenon that is largely based on people anticipating that other people will continue to see value in this thing".

The future of Bitcoin as a currency is uncertain. On the one hand, Bitcoin has been criticised for its extreme volatility, lack of universal acceptance, and inability to generate income. It has also been the subject of increasing regulatory scrutiny, and some have compared it to economic bubbles, such as the Dutch Tulip Mania in the 1600s, or the 1995-2000 dot.com bubble.

On the other hand, Bitcoin has several advantages that could make it a viable currency in the future. It is decentralised and secure, using robust cryptographic techniques to protect transactions. It can also be easily transferred and traded in fractions, and it has low transaction costs, making it useful for cross-border payments and remittances.

Additionally, the underlying blockchain technology has been hailed as revolutionary, with the potential to transform how we organise transactions in various industries. If the value of Bitcoin stabilises, it could become a widely accepted means of payment and an alternative to cash. However, as of now, it is still a speculative investment, and its future as a mainstream currency is yet to be determined.

Bitcoin's decentralised digital money

Bitcoin is a decentralized digital currency, or cryptocurrency, that was invented in 2008 by Satoshi Nakamoto, an unknown person or group. It was first used as a currency in 2009 and is currently the most well-known cryptocurrency. Bitcoin is based on a free-market ideology and operates as a peer-to-peer network, with transactions verified through cryptography and recorded on a public distributed ledger called a blockchain. This ledger is maintained by a network of nodes, which are individual computers, without central oversight.

The advantages of Bitcoin's decentralized structure include faster and cheaper money transfers, increased security, and the removal of single points of failure. It also allows for the removal of third parties, such as banks, and enables users to generate returns and streamline remittances. Additionally, Bitcoin's decentralized nature means it exists outside the control of governments and central authorities, rendering it theoretically immune to government interference or manipulation.

However, there are also disadvantages and risks associated with Bitcoin's decentralized digital money. One of the main concerns is price volatility, which has led to Bitcoin being described as a speculative investment. Other risks include high energy consumption for mining activities, user risk due to the irreversibility of transactions, regulatory risks, counterparty risks, management risks, programming risks, and the potential for market manipulation.

Despite these risks, Bitcoin has gained widespread attention and investment, with some major companies and institutions acquiring Bitcoin. It has also been recognized as legal tender in El Salvador and, as of 2023, is estimated to have 81.7 million users worldwide.

Bitcoin's bubble and burst

Bitcoin and other cryptocurrencies have experienced dramatic price changes, sometimes gaining or losing more than 40% in price in just a month or two. The price of Bitcoin has been extremely volatile, with several boom-and-bust cycles over the years.

The 2011 bubble

In February 2011, the price of Bitcoin rose to US$1.06, then fell to US$0.67 in April. In June, the price rose again to US$29.58 after media attention from a Gawker article about the dark web market Silk Road. The price then fell to US$2.14 in November.

The 2013 bubble and 2014-15 burst

In November 2013, Bitcoin's price rose to US$1,127.45. It then gradually declined, bottoming out at US$172.15 in January 2015.

The 2017 bubble and 2018 burst

After an unprecedented boom in 2017, the price of Bitcoin fell by about 65% from 6 January to 6 February 2018. Soon, nearly all other cryptocurrencies followed Bitcoin's crash. By September 2018, cryptocurrencies had collapsed by 80% from their peak in January, making the 2018 cryptocurrency crash worse than the dot-com bubble's 78% collapse.

The 2020-22 bubble and burst

In March 2020, the price of Bitcoin fell by 30% from $8,901 to $6,206. By October 2020, Bitcoin was worth approximately $13,200. In November 2020, Bitcoin surpassed its previous all-time high of over $19,000. After another surge in January 2021, Bitcoin crashed by 17% the next day. On 14 April 2021, Coinbase, a crypto exchange, went public on the NASDAQ, and its shares grew by over 31% on the first day. However, by May 2021, the crypto market experienced a broad sell-off, with nearly all cryptocurrencies down by double-digit percentages.

The 2024 burst?

In May 2024, it was reported that Bitcoin had dropped 77% from its trading peak in November of the previous year. Bank of America Research's Flow Show research note put this decline in historic terms, stating that it was the fifth-worst collapse of an asset in financial history.

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