We’ve had the bubble in the price of gold, the smart investors in the US and Europe and the bubbles in commodities such as wheat and oil. Now, with Bitcoin prices topping the charts it’s another case of a bubble being developed before our eyes.
Most people have not taken a look at the underlying technology behind Bitcoin, the blockchain. This is an online ledger of transactions which are recorded online by miners, who have their own computers, to verify the trade. All transactions are recorded and the information is stored in a public database, called the block chain.
One main issue is how this information will be kept safe from hackers, criminals and corrupt governments. So far no solutions have been provided to protect the information as the price of Bitcoin skyrockets, so that one day we’ll all wonder why the price went up so much without us knowing about it.
There is, however, the argument that unlike an actual physical asset such as gold, which can be stolen or devalued, Bitcoins can’t be taken. It’s true that they can be “mined” which involves having to buy up as many Bitcoins as you can to create the illusion of scarcity. However, if you try to sell them for cash, they’ll be worth much less than you paid for them, because of the hacker or government problem, but before the end of the week they’ll be worth what you paid for them.
Even if there were some way to keep the value down over time, it would still be a good value because there’s a lot of it’s an Internet-based invention. Even when it was first created, there were only a few hundred thousand people using it and when it first became popular, there were only a couple of thousand websites accepting it as payment.
However, as more websites started accepting it, we saw huge numbers of people making payments for goods and services. Just one Bitcoin is worth a small fortune now, because of the demand. Although Bitcoin prices have been a constant concern, but we’re a long way from worrying about them.
So, where are these Bitcoins going to come from? Many pundits believe that the banks will print up a lot more than the number that the market is saying there is because they are eager to build this into a global currency, like their own.
We’ve seen private banks to increase their reserves of gold and now the British bank, HSBC, has increased its Gold holdings. A lot of people may think it’s great, but others see this as a massive scam, given that it would be the largest holding of gold in the world.
So, are the banks looking to make a large investment in other assets? That’s possible, but we can expect that the price of Bitcoin will skyrocket and prices will be more stable because the only thing that’s controlled by the banking system is speculation.
The recent decision by the Fed to increase its holdings of gold is just one step towards establishing a gold standard, the same as the one that existed in the 1930s. People who remember those times can’t help but compare it to the present economic crisis, as we consider the value of the dollar plummeting.
Another way of stating this is that governments don’t want to abandon the power of the fiat currency that the market thinks they have. So they’re coming to realize that they must control the flow of information, that the price is highly speculative and that the price is highly volatile, so they’ve decided to pour money into the use of technology.
To implement a gold standard, you need computers to keep track of the accounts, so the Fed and other central banks would have to find other ways of controlling information. They need computers, so that could be a plausible solution for controlling the flow of information, such as gold andBitcoin, but it’s a separate question.