Will bitcoin become the fourth classic bubble in history?

December 12, 2017 09:59
The bitcoin frenzy has drawn comparisons to the tulip mania that gripped Europe in the 17th century. Photo: Reuters

Tulip Bubble, South Sea Bubble and Mississippi Bubble are three major economic bubbles in history, something that I learnt during my time as a student at the London School of Economics and Political Science.

The current market hype about bitcoin is frequently compared with the tulip mania.

They can't be deemed real currencies, as they do not provide three basic currency functions: a medium of exchange, a store of value, and as a unit of account.

But as long as people are willing to trade them, they can serve as investment products.

Bitcoin prices are extremely volatile. They surpassed US$19,000 at one point last Friday, but at the beginning of this year, they traded at less than US$1,000 each.

Although bitcoin price has surged more than fifteen-fold this year, huge declines have been seen before. The virtual currency saw its price plunge 93 percent between 2010 and 2011, and slump 84 percent between 2013 and 2015.

China's cryptocurrency community has several million investors. Participants include employees or users of bitcoin exchanges, bitcoin miners, professionals studying blockchain technology, etc.

The People's Bank of China halted operations for digital currency trading platforms in Beijing and Shanghai in September, sending a shock to the market. China exchange-traded bitcoin used to represent 30 percent of the global market.

Over-the-counter (OTC) bitcoin exchanges quickly emerged on the scene after China shut down bitcoin exchanges. Most of these trading platforms are located in Hong Kong, US or Japan. Peer-to-peer transactions and direct trading with bitcoin miners are two other ways for mainland Chinese to buy bitcoins.

Now, as the Chicago Mercantile Exchange prepares to launch bitcoin futures, the market could become more transparent going forward.

This article appeared in the Hong Kong Economic Journal on Dec 11

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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Senior investment banker