Bitcoin – another Tulip boom

30 November 2017 8:51 am

Much has been made of Bitcoing surging past $11,000

Bitcoin has risen tenfold in value so far this year, the largest gain of all asset classes. Everyone from Wall Street executives to venture capitalists have been weighing in with their forecasts. Some are sceptical and some are tipping Bitcoin will “go to the moon”. CME Group says it plans to start offering futures contracts for Bitcoin, which could begin trading in December, pushing it into mainstream investing and increasing the value even further.

Bitcoin has all the makings of another tulip disaster. There was a boom of tulip prices in Holland in the 17 century. Around 1636, tulip bulbs were traded on the stock exchanges of numerous Dutch towns and cities, encouraging all members of society to speculate in the markets. Many people traded or sold possessions, including properties, to participate in the tulip market mania.

The bottom fell out of the market in 1637. Prices started slipping and sellers panicked. The value of prize tulips fell from 6000 florins to 400 as it dawned on people they owned bulbs, not assets. People were wiped out.

The same problem is with Bitcoin. The boom in Bitcoin is parabolic and parabolic and parabolic moves don’t last.

Right now there are Bitcoin holdings worth hundreds of millions of dollars. There will come a point where whale traders will sell a moderately large blcoks of their assets below the market rate. That will cause a panic sell-off by small traders and the price will crash. The whale will then scoop up the Bitcoin assets when they have reached a satisfactory low.

Traders call that practice “shaking out weak hands”.

The Bitcoin boom tells us that nothing changes. Such is the madness of crowds.