Three reasons bitcoin fever will rage on, even after this bubble bursts

Niall Ferguson says lessons from the South Sea Bubble show that the inevitable bust doesn’t necessarily kill the innovation. The financial innovation that created cryptocurrencies like bitcoin and the blockchains they are built on will continue to find buyers

Reading Time:3 minutes

Tokens of the cryptocurrency bitcoin placed on a monitor displaying binary digits. Even if regulatory changes in the US do deflate the bitcoin bubble, they will not halt this financial revolution. Photo: Reuters

Published: 3:06pm, 11 Dec 2017Updated: 7:18pm, 11 Dec 2017

A little more than three years ago, I made the worst investment decision of my life. “You know, Dad,” my then 15-year-old son said, “you really ought to buy some bitcoin.” Yes, that’s right, bitcoin: the newfangled “cryptocurrency” based on something called blockchain technology, invented in 2008 by a mysterious Satoshi Nakamoto.

“Listen, son,” I said, “that is no way to invest my hard-earned pounds ... The governments of the world are not about to let their monopolies on national currencies be undermined by a currency that’s already being used for nefarious purposes by criminals and money launderers.” Son: “Yes, but …” Me: “No buts – I’m not throwing real money down the virtual drain.”

In October 2014 – when something like that exchange took place – the price of one bitcoin was US$334. As I write, it is US$15,150. If I had listened to my son, I would have increased the dollar value of my investment by a factor of 45 – or, if you prefer, I’d have made a return on the investment of 4,436 per cent.

It’s never too late to recover from an investment blunder, of course. But what if buying bitcoin now would make me the “greater fool” – the last man in, who gets left holding the bitcoin when the bubble bursts and the price plummets? Financial history is full of examples of investment manias that at some point turned into panics and crashes.

He accidentally threw away his bitcoin codes in 2013. Now they’re worth US$108 million

Like the five stages of grief (denial, anger, bargaining, depression and acceptance), there are five stages to most financial bubbles. First, displacement: a change in economic circumstances creates new and profitable opportunities. A new financial asset is born. Second, euphoria: where expectations of rising profits lead to a rapid rise in the price of the asset. Third, mania: the prospect of easy money attracts first-time investors as well as swindlers eager to part them from their cash. Fourth: distress: the insiders discern no future gains can possibly justify the now exorbitant prices and begin to take profits. Fifth: revulsion or discredit: as prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether.

Three reasons bitcoin fever will rage on, even after this bubble bursts

Niall Ferguson says lessons from the South Sea Bubble show that the inevitable bust doesn’t necessarily kill the innovation. The financial innovation that created cryptocurrencies like bitcoin and the blockchains they are built on will continue to find buyers

He accidentally threw away his bitcoin codes in 2013. Now they’re worth US$108 million

Bitcoin: financial revolution or modern tulip mania?