Bitcoin, Tulip Mania and the need to dwell with knowledge
Bitcoin, Tulip Mania and the need to dwell with knowledge.
As I write this on the 20th of December 2017, 1 Bitcoin (BTC) is worth $ 18,969.33. Exactly one month ago, 1BTC was $ 7,773.30 1. That’s a gain in value of 144% or 5% per day. Even more astounding, it was worth about $1,000 at the start of the year and less than a dollar back in 2011. Suffice to say, you are more than likely to hear everyone talk about this at your Christmas day party.
At over 1,000% annual growth, the surge in pricing has been compared with bubbles such as Tulip Mania back in the early 17th Century. Back then, Tulips were being brought from Turkey to the Netherlands and the novelty of a new flower made it a fairly treasured after item. Owing to a mosaic virus that caused the petals of the tulips to appear like it was aflame, demand grew rapidly, and the price shot up. 2 People jumped into the Tulip business because they were speculating that the price would continue to rise, and they’d make super normal profits as demand quickly outstripped supply.
This was a bubble. Which in layman’s terms means rapid growth in the price of an asset often due to speculation of future growth, just before a contraction. Many economists believe this is what is happening with Bitcoin.
The danger with bubbles is they are often only identified with the benefit of hindsight. The housing bubble in the US for example. For cryptocurrencies like Bitcoin, this super normal growth is both great for mainstream attention and dangerous as volatility and false moves could damage their reputation irreparably.
Why you should be concerned?
A good currency must meet a few tests: Scarcity-meaning there isn’t an infinite amount of it; fungibility: divisibility-it can be broken down into smaller units, durability; and transferability-can easily be transferred between owners. It’s the last bit that concerns me. Transferability., With Bitcoin and other currencies essentially becoming speculative assets, people are starting to hoard them as a means of gaining wealth and not as a means of exchange for goods and services.
As more and more people and businesses invest in Bitcoin, should the bubble burst, they will be left holding worthless digital coins. Value will be destroyed. No one will be willing to lend or borrow in currency like that. The fundamental value of Bitcoin is as a decentralized, private means of exchange. With more public interest, the waters are getting murkier. It cannot continue to grow as an investment device and also be a widely used currency.
For those of us interested in financial inclusion, Bitcoin and cryptocurrency show some promise in helping alleviate issues of high cost of financial transactions, being used already in counties like Zimbabwe during crisis. Remittances were being sent home by Zimbabweans abroad. 3 As the founder of the founder of LA Maison du Bitcoin in Paris, a licensed exchange service for Bitcoin, said,” For bitcoin, all you need is a phone.” Electronic cash has been the mechanism of choice for financial inclusion the world over, following the proliferation of phones in places traditional financial service infrastructure would never go.
As FSD Uganda, our goal is to have a deeper, broader and more effective and inclusive financial services system. As such, we have begun the work of researching cryptocurrencies and block chain technologies that run them, looking for a way to utilize the innovation for good. We might not clearly see a ready use case that can be applied to the financial system of Uganda, but we do know that we cannot ignore the potential that lies to usher in a new means for exchanging financial information. The challenge as stated above will be in navigating these early rocky waters. Should the “Bitcoin bubble “burst, how long will it take for financial institutions let alone people even consider using something like it again?
Over the next 3 years, we shall investigate possible applications and work to build a better grasp of these emerging technologies across all market actors. As the good book says, “Dwell with them according to knowledge”
Happy Holidays and here’s to a more inclusive, 2018