17A032 Tulips and Bits by Jim Davies, 9/19/2017    

In 1636 there was a notorious Tulip Bubble. Investors eager to make a fast buck noticed that the price of bulbs of the newly introduced tulip was rising fast, and rushed to join the fun, so the price rose yet more, until it didn't. Then there was a horrid crash, and shirts were lost, and those ruined wondered how they could have been so irrational.

Recently, there has been a vast rise in the price of Bitcoin, the virtual, international crypto-currency; as measured, that is, in terms of the virtual, national fiat currency called the US Dollar. The chart (from xe.com) shows what has happened in the past year. In contrast, the price of gold - a more seasoned alternative to fiat money - meandered some as below, but showed no particular up-trend. So is Bitcoin a tulip-like bubble?

The price of tulips fell, in 1637, because farmers - notably in Holland - could readily reproduce them; the supply rose to meet the demand as soon as Nature could be harnessed to cooperate. Ever since there has been a healthy market in the flowers and their bulbs, but nothing to generate fast fortunes. To figure out whether Bitcoin will follow the flowery example, we need to know the likely future supply, as well as the demand.

The first of those elements is known quite well; the mechanism is still a mystery to me but the designer's promise is that the supply of BTCs, now about 11 million, will rise at a decreasing rate to 21 million by 2040 and then stay constant. Taking this promise as it stands, that's very useful; in contrast government fiat currency supplies increase in whatever way the politicians of the moment find convenient and so decree.

Then consider the demand - which has obviously been the driving factor in the recent price rise, since the BTC supply has changed very little in the last year - just a slight rise. What's causing the heavy demand, and how will it continue? I suggest those are the key questions.

I'd like to think that the market has finally tired of government currencies and is abandoning them to their miserable fate; but it cannot be so because if it were, the price of gold would also be spiking, and it's not. That happy development will take place eventually, and when it does, all good alternatives to government paper will enjoy a rapid increase in purchasing power.

For example if the highly convenient features of BTC (very low transaction cost, impediment-free transfers across national boundaries, a high degree of privacy, virtually instant timing...) were to enable it to capture 10% of the world's fiat-currency supply (say, $50 trillion) then by 2040 21 million BTCs would be replacing $5 trillion worth of government fiat. Therefore the price of one BTC would be (5T / 21M =) $238,000 each. That's more than sixty times today's allegedly unrealistic price.

Unfortunately in my view those highly desirable reasons to switch to BTC do not yet apply (again: if they did, some of the reasoning would brush off on gold, and it hasn't) so we should seek an alternative reason for the current high demand for Bitcoin. What can it be?

I can think of only one reason for the high demand, and that is the kind of mania that drove the tulip bubble; the unreasoned, unintelligent rush to be in on a good thing even though most of the buyers neither understand nor care about the dangers of letting government control money.

The twist is that this time, in contrast to 1636, these shallow investors may get lucky. One of the reasons may be that BTC and other cryptocurrencies are rapidly developing into applications more than money itself. "Blockchain technology" is becoming perceived as a way to transfer assets of all kinds, securely and without the blessing of middlepersons. One of them is Ethereum, recently praised by Putin of Russia; the name suggests that Mendeleev has returned from the dead and added a new element to his Periodic Table, plucked mysteriously from the ether, for the benefit of his native land. By endorsing that system, Russians may be finding a way round the Obamoid sanctions that have so damaged their welfare.

Meanwhile another deadly government action - socialism in Venezuela - is shown in the same article to be countered by residents who mine Bitcoin for a living, to bypass its restrictions.

What part will cryptocurrencies (AltCoins) play in the coming Zero Government Society? - probably a big one, bigger than I'd have guessed a few short years ago; not just as money, but as whole systems of commerce. It's an exciting future. Nonetheless, they are no substitute at all for a thorough grasp of the need to terminate government altogether; without that understanding, and the education which alone can produce it, power-freaks will find ways to adapt to the new technology and retain control.