Stop speculating; Bitcoin not a bubble

BITCOIN is the first decentralised digital currency that emerged in 2009 after the financial crisis of 2007–2008, also known as the global financial crisis.

The 2008 financial crisis is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s.

It began in 2007 with a crisis in the subprime mortgage market in the US, and developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, 2008.

Excessive risk-taking by banks such as Lehman Brothers helped to magnify the financial impact globally. Massive bailouts of financial institutions and other palliative monetary and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was nonetheless followed by a global economic downturn the Great Recession and later by the European debt crisis.

Why Bitcoin is not a bubble

The unit of account of the bitcoin system is bitcoin. Ticker symbols used to represent bitcoin are BTC and XBT. Its Unicode character is small amounts of bitcoin use.

Secured and transparent

The blockchain is a public ledger that records bitcoin transactions. A novel solution accomplishes this without any trusted central authority: the maintenance of the blockchain is performed by a network of communicating nodes running Bitcoin software.

Friendly and low fees

Transactions are defined using a fourth-like scripting language. Transactions consist of one or more inputs and one or more outputs. When a user sends bitcoins, the user designates each address and the amount of bitcoin being sent to that address in an output.

Ownership

There is simplified chain of ownership. In reality, a transaction can have more than one input and more than one output.

In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address is nothing more than picking a random valid private key and computing the corresponding Bitcoin address.

Mining

Mining is a record-keeping service done through the use of computer processing power. Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes. To be accepted by the rest of the network, a new block must contain a so-called proof-of-work.

Wallet

Wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold or store bitcoins, due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger. At its most basic, a wallet is a collection of these keys. Software wallets and hardware wallets are types of wallets.

Speculative bubble dispute

Bitcoin has been labelled a speculative bubble by many including former Federal Reserve Chairman of the United States, Mr Alan Greenspan, and Economist John Quiggin.

Nobel Memorial Prize laureate, Robert Shiller, said that bitcoin "exhibited many of the characteristics of a speculative bubble". A journalist, Matthew Boesler in 2013 rejected the speculative bubble label and saw Bitcoin's quick rise in price as nothing more than normal economic forces at work.

Timothy B. Lee in his 2013 piece for The Washington Post pointed out that the observed cycles of appreciation and depreciation do not correspond to the definition of speculative bubble.

Two lead software developers of bitcoin, Gavin Andresen and Mike Hearn, have warned that price dip may occur. A Vice-President at the Federal Reserve Bank of St. Louis, David Andolfatto, stated, "Is Bitcoin a bubble? Yes, if bubble is defined as a liquidity premium”.

To Andolfatto, the price of bitcoin "consists purely of a bubble," but he concedes that many assets "have bubble component to their price". Speculation in Bitcoin has been compared to the tulip mania of seventeenth-century Holland. Comparisons have been made by the Vice-President of the European Central Bank, Vítor Constâncio, the JP Morgan Chase Chief Jamie Dimon, the Hedge Fund Manager, Ken Griffin of Citadel, and a former President of the Dutch Central Bank, Nout Wellink.

On September 13, 2017, Jamie Dimon compared Bitcoin to a bubble, saying it was only useful for drug dealers and countries such as North Korea but later regretted calling Bitcoin a bubble after buying $200 million worth of bitcoin.

The Guardian, CNBC, Forbes and the Evening Standard compared Bitcoin to bubbles such as the South Sea Bubble, the Wall Street Crash, the subprime mortgage crisis and the Dot-com bubble but concluded that Bitcoin has been witnessing price corrections since 2012 due to investor spending during the festive season.

Writer’s email: sebastian.syme4@gmail.com