12th January 2018

Bitcoin: speculative bubble or money of the future?

As Bitcoin, which was created in 2009, breaks new records each week and has now passed the $9k mark, economists are divided: is it really a new, decentralised currency free from any central bank or is it a purely speculative instrument? Eric Pichet, a KEDGE professor specialising in macroeconomics and monetary policy, shares his take on the phenomenon.

He says: "Increasingly widely accepted as a means of payment with no bank intermediation and absolutely no fees, Bitcoin has some of the attributes of a headless currency. Nevertheless, it has no intrinsic value; not even as a collector's item because it is intangible. Nor is it a financial asset like a stock or bond because it has no returns. Its only investment value lies in the possibility of appreciation bestowed on it by those who hold it: it is an asset with no underlying."

In Mr Pichet’s view, the phenomenon is characterised by the following elements:
• The ingenious idea of its creator, the legendary Satoshi Nakamoto, was to have designed a system of issuance founded on new technologies that are completely decentralised and, for the moment, completely secured by the blockchain users. In addition, the IT algorithm limits the ultimate number of bitcoins to 21 million (18 million are currently in circulation). The relative rarity of the virtual product explains its rise in large part because only 0.01 per cent of the world population own any. Therefore, one can imagine the effect on its trading price if the primary cause of speculative bubbles, namely FOMO (Fear of Missing Out) were to spread to a mere 1 per cent of the world population, or 100 times more holders.

• It was reported that the price of Bitcoin had exceeded the price of gold based on a comparison of the 10,000-dollar Bitcoin figure to the 1,300-dollar price tag of one ounce (31 grams) of gold. However, this comparison has little meaning because the total capitalisation of all the bitcoins issued ($160bn) can hardly be compared to the total value of the world's gold reserves, which are amount to $8trn. Then there is the estimated value of all the world's financial assets at $150trn, not to mention $240trn in international real estate.

Mr Pichet concludes: "Under these conditions, what type of needles would burst the bubble? The first would be the heist of the century: an intrusion in the blockchain system that created a deluge of fake bitcoins. The second would be the adoption of a common position by all national governments and central banks to prohibit this means of payment in the name of fighting fraud, for example.

“In the end, the Bitcoin bubble would join the long list of great collective follies, including the Tulip Mania of 1637, the Law's System in 1820 and the 2000 Internet bubble. Unfortunately, even assuming there is a way to sell Bitcoin short this strategy should be avoided as it could prove disastrous. Indeed, no one can predict how high it will go, or how long the speculative wave will last. And as Keynes taught us, ‘the market can stay irrational longer than you can stay solvent’. So there is just one thing left to do: sit on the bank of the river and watch for the Bitcoin cadaver to float by one day."