What If Bitcoin Is No Bubble

Posted by on January 16, 2018 4:55 am
Tags: , ,
Categories: speculation

By Milosz Matuschek

When we talk about Bitcoin and co., it is often said that it must be a speculation bubble. This however could turn out to be a mistake.

If you had a choice, what would you choose? You will receive either

a) 10,000 dollars per week over the period of one year, or

b) twice as much as the previous week during the same period, starting with one cent.

If you think like most people do, then intuitively choose the impressive sum of 10,000 dollars a week and at the end of the year you are 520,000 dollars richer. What if you had chosen the option with the cent?

Then you needed a financially strong betting opponent: you would then have almost 87 million times as much as in the first variant, namely over 45 trillion dollars.

The reason for this is simple: our brain can imagine steady, linear growth, but not exponential growth.

A stock market share that is rising linearly and steadily us already ringing alarm bells. On the other hand, if the share rises exponentially, the bubble is supposedly close to bursting, according to the motto “What comes up, must come down.”

Since the Dutch tulip speculation it has always been like this, hasn’t it.

Counter-question: do you travel by train, car or plane every now and then?

These are inventions of the last 100+ years whose distribution has only increased globally in the course of time.

Software has been expanding exponentially in all areas of life since the 1970s, and the same is true for the smartphone.

But with all these examples, does anyone speak of a bubble? Does anyone say, “Digitization has spread so radically, it’s all going to end up in a huge crash, and then we’ll be sitting in front of a slide rule again”?

The biggest mistake with regard to the so-called Bitcoin bubble could be that this innovation is seen as a pure asset class, like a stock, a government bond or a tulip — and forgets the network-effect of it.

Bitcoin and other cryptocurrencies are network-centric money, and blockchain-based business models are novel platforms that make sense wherever middlemen need to be replaced.

Blockchain technology is an invention, like a new tool. And inventions cannot be reversed any more than you can turn an omelette into an egg.

What has never been seen before in this development is also the fact that it is possible to follow the growth of blockchain-based business models virtually in real time, just a look at coinmarketcap.com is enough.

This does not mean that losses or setbacks cannot occur, especially since the sector is still young and highly volatile.

However, if you compare Bitcoin and co. with fashionable trends such as Pokémon Go, the fidget spinner or even tulip bulbs, you should not forget that it was difficult to build up a protocol-based, worldwide and decentralized network on tulip bulbs.

The state and central banks warn against investing in Bitcoin and other digital currencies. You could lose money, said German Bundesbank president Jens Weidmann.

Where are the warnings against state gambling casinos, state lotteries, investments in life insurance, government bonds or in one’s own inflationary, arbitrarily reproducible state payment slips, also known as money?

(translated from Neue Zürcher Zeitung)