The meteoric rise in the price of Bitcoin is creating a buzz wherever folk congregate to ponder get-rich-quick ideas.
I remember the similar dotcom bubble from the turn of the century, but such things have been going on for as long as the human desire for wealth. All you need is a new fad, a limited supply, and hordes of people pumped up by the idea of getting something for nothing.
As I write these words, Bitcoin is trading at a shade under $18,000. That’s up from less than $800 a year ago, and from just a few pennies in the immediate aftermath of its launch. But could it really reach $30,000 by Christmas? I really think it could — but I wouldn’t risk a penny on it.
At the height of the Dutch tulip mania in the seventeenth century, it was said that a single bulb of Semper Augustus was exchanged for five hectares of land. Desirable bulbs were being sold for around 10 times the annual salary of a skilled worker — and a single Bitcoin has a long way to go before reaching such an exalted valuation, so the price really might be headed a lot higher yet.
Even the best
And the dotcom bubble? Between December 1997 and the end of 1998, stock in Amazon.com soared by around 1,200%, and the fears of a subsequent crash were growing daily — a bit like Bitcoin now. But Amazon shares went on to climb higher and peaked in April 1999, only to come crashing down again. By September 2001, Amazon stock was selling at around $6 per share, down from a peak of $107, for a whopping 94% loss.
Amazon was actually one of the very best of the dotcom era companies, and it’s gone on to make many investors wealthy — but the graveyard is littered with the headstones of most of those high-flyers whose new economy businesses turned out to have no chance of profitability.
What was happening then was a growing demand for something that was in limited supply — tulip bulbs, shares in dotcom companies — and as long as more people wanted to buy than sell, the price could only keep on going higher.
Supply and demand
We’re seeing a very similar thing with Bitcoin, as the amount of the stuff that can be produced is fixed. There are technology-based rules which limit the total number of units that can be mined to 21m, and there are 16.7m of those currently in existence. The cost of production is low, even though it has been estimated that the computing power currently being used to mine the 3,600 bitcoins being created every day is using energy at a higher rate than the entire country of Ireland. Had there been no upper limit to the supply of the stuff, supply and demand would eventually balance and the boom would surely fizzle out.
But the thing is, during tulip mania, other flowers were available, just as other shares were available during the dotcom boom. And other cryptocurrencies are, and will continue to become, available too. And there will be new fads to draw in the crowds.
Bitcoin could well reach $30,000 by Christmas, but how about a year later? I reckon we could easily see a 90% crash in the next 12 months. In my view, Bitcoin is definitely not something for rational investors.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.