Newspaper article The Journal (Newcastle, England)

The Bursting of the Bitcoin Bubble

Newspaper article The Journal (Newcastle, England)

The Bursting of the Bitcoin Bubble

Article excerpt

DURING a trip to Holland last year, I visited a Tulip Museum and purchased a large Amaryllis bulb for just eight euros.

Just under 400 years earlier, such a bulb would have cost considerably more in today's terms. In fact, at one point, at the height of what became an incredible, speculative bubble, single tulip bulbs were reportedly exchanging hands for more than 10 times the annual income of a skilled craftsworker and one particular variety was worth upwards of five times the cost of an average Dutch house at the time.

Tulip mania as it became known, remained the biggest, recorded speculative bubble in history - until now. Unless you have been living in a bubble of your own, you can't have failed to have heard of Bitcoin. It is a computer-based currency known as a cryptocurrency of which there are now well over a thousand.

Research from New York-based, Convoy Investments released this week concluded that the Bitcoin bubble has now surpassed that of tulip mania as the biggest ever economic bubble, as shown in the chart below.

Bitcoin, introduced in 2009, was the first of the new online currencies and its value has seen spectacular volatility and growth.

Like everything else, Bitcoin is only worth what anyone else is prepared to pay for it and that price has largely been fueled by significant demand which has been fueled by the significant rise in value. From mid-2010 to the start of 2013 the price of Bitcoin varied widely but ultimately increased by more than 167,000%, from a low of $0.008 to more than $13. Less than 11 months later, it had increased by a further 7,000% to reach $979.

However, those that bought in at this point saw 75% of their investment wiped out over the next two and a half years. But by January this year, the price had recovered to its 2013 high. And then it doubled, and then did so again, and again, and again.

At the time of writing Bitcoin is trading at $17,070 and it is not inconceivable that the spectacular increase in value will continue to tempt new investors, which will see the price pushed up even further - before it collapses.

Cryptocurrencies are as good as unregulated by any real sense but this won't always be the case. …

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