“The curious task of economics” von Hayek observed, “is to demonstrate to men how little they really know about what they imagine they can design”. Bitcoin, the poster child for the brave, new world of decentralised cryptocurrencies, is in a curious position of being possibly the first widely-traded security in living memory where investors, traders and regulators appear to indeed be aware of exactly ‘how little they really know’.
Ever since its price started climbing to astronomical figures little over a year ago, concerns and anxieties about nearly every aspect of the cryptocurrency market have developed into outright consternation and distress. For the majority it is now a case of when, rather than if Bitcoin will crash, and market participants are scrambling to understand the implications of such an event. However for those that have bravely ridden the rise there is a palpable sense of excitement that Bitcoin could be a once-in-a-lifetime gamble, providing incredible returns by circumnavigating the traditional rules and assumptions of financial markets.
For institutional players, including banks, regulators and governments, Bitcoin represents one of the purest examples of outright speculation in financial history. Jamie Dimon, CEO of JPMorgan Chase, recently labelled Bitcoin a “fraud” concluding that “The currency isn’t going to work” (Guardian). Constrained only by the eventual circulation amount (just under 21 million), Bitcoin is based on an innovative technology called Blockchain, which revolves around a single ledger that records all transactions. Unlike traditional forms of transactions no single party can control the ledger, which allows Bitcoin owners to transact and trade without the assistance of the mainstream financial infrastructure. Initially adopted by those seeking to maintain privacy over their transactions, Bitcon’s rapidly rising value has attracted more and more buyers into the market, fuelling ever-faster price rises. From a market perspective, it is clear that Bitcoin is well ahead of many previous bubbles such as the tech and housing booms, inevitably raising the question of how overvalued it truly is and when the crest will arrive.