Why the Bitcoin “bubble” isn’t just another tulip event

8 December, 2017

In the 1500s tulips were first brought from Turkey and introduced to the Dutch. The novelty of the new flower made it widely sought after and therefore fairly pricey. This price – and the accompanying rarity quickly increased due to a virus which caused discolouring of the petals.

The uniqueness of the plants attracted massive popular dealing in the bulbs, essentially speculating on the tulip market, which was believed to have no limits. At the peak of the market, a person could trade a single tulip for an entire estate. Obviously, the tulip craze could not last and dealers were left with nothing. Once they realised they had traded their homes for a plant, panic and pandemonium became prevalent throughout the land. No one emerged unscathed from the crash. Even the people who had locked in their profit by getting out early suffered under the following depression.

At the beginning of 2017, the highly volatile Bitcoin was valued at just below USD1,000. Over the past few days it has skyrocketed well into the teens at a high of over USD19,000, and at the moment of writing this article sits at USD17,677, having fluctuated over a range of USD4,000 today alone. While you could be forgiven for thinking this could be just another “tulip bubble”, it is our proposition that Bitcoin has the staying power.

Over the last year, Bitcoin’s price has spiked in much the same way as the tulip bulb of 500 years ago, with a single coin yesterday reaching a record USD19,340, on the Coinbase exchange, which accounts for about a third of the digital currency's volume on any given day.

Source: TradingView.com

But Bitcoin is not a plant. It is an e-currency. One of the main reasons the Bitcoin bubble won’t happen, lies in its relationship with blockchain technology.

Bitcoin transactions are stored and transferred using a distributed ledger on a peer-to-peer network that is open, public and anonymous. Blockchain is the underpinning technology that maintains the Bitcoin transaction ledger.

The confidence in blockchain technology is already being recognised worldwide. Australia’s own stock exchange yesterday announced it would replace its CHESS system with blockchain based distributed ledger technology (DLT) developed by its technology partner Digital Asset (DA), the first exchange in the world to do so. This decision follows the successful build of enterprise-grade DLT software for core equity clearing and settlement functions; there had been extensive suitability testing by ASX and DA over the past two years. The testing confirmed ASX’s confidence in the functional, capacity, security and resilience capabilities of the application “to meet the needs of Australia’s financial marketplace and maintain the highest regulatory and operational standards”.

The testing included two independent third party security reviews – a vital part of the electronic process - of DA’s technology.

There are now reportedly millions of blockchain exchange accounts waiting in line to be approved/verified (a process that takes up to 48 hours) and the rapid rise to popular fame of the Bitcoin has attracted wider attention to the underlying value of blockchain technology. This undoubtedly means everyone’s getting in on the rush, and there will be a bigger cash splash to come very soon, as the delayed verification creates further delayed capital injection.

Plenty of money will undoubtedly be injected into these new crypto markets in the next few days. So, hold on to your hats. Bitcoin is only one of the e-currencies available in the market place, but it is, for the moment at least the beacon of e-currency.

Taking into account that the funds markets are setting up hundreds or even thousands of these accounts at a time, this means that there could be a battery of significantly delayed reactions.

There is even talk of a USD2 million price for the bitcoin. Then again it could disappear in 12 months. Take your pick. Is it disruptive? Yes, whatever comes next. Because even if Bitcoin doesn’t continue on its trajectory it is part of something much, much bigger.

(But NB: we’re not giving financial advice; we won’t be investing in bitcoin; and anything you do will be highly speculative. If you want to live on the edge that’s up to you. Otherwise you can be like everyone else and keep saying “gee I wish I’d bought in when they were….")