Expert Opinion by CAPCO, International Consulting Firm in Management and Transformation Specialized in Financial Services
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Bitcoin is celebrating its tenth anniversary this year. Developed by a creator using the pseudonym Satoshi Nakamoto, Bitcoin is the first cryptocurrency and the first use of the blockchain for commercial purposes.
It took almost nine years, after its creation in 2008, to reach a stratospheric bubble level. In 2017 alone, the price of Bitcoin increased by 1,300%. But it is not the cryptocurrency whose increase is the most impressive: this honor goes to Ripple, whose dizzying flight has reached 36,000%!
"When is the lambo? "
Many people rightly say that this is the biggest speculative bubble ever known. Driven by the exuberance of irrational investors and the fear of missing out on something ("Fear of missing out", "FOMO"), cryptocurrency prices have more than increased tenfold in 2017.
The Internet is full of stories of people making tiny investments, sometimes as small as a few hundred dollars, in millions. On social networks, they are called "lambos". "When is the lambo? Has become their slogan to ask when their cryptocurrency will pay them enough to buy a Lamborghini. In fact, the sites of luxury car dealers accepting only payments in bitcoins or ethereums have multiplied on the internet.
Is the party over?
But since May 2018, the price of Bitcoin has fallen 65% from its highest level, as the course of the majority of crypto-currencies that have suffered a major collapse. Will the fall continue? To find out, it seems useful to put things in perspective by returning to the history of this phenomenon. There are indeed a number of historical precedents that can help us better understand the behavior of speculative bubbles; two of them are related to mass technological innovations, like Bitcoin.
The 1840 British Mania Railway and the late 1990s Internet bubble were both the result of large-scale technological innovations that promised to change the world. The railway bubble of the 1840s was favored by the achievements of civil engineering and the Internet bubble was fueled by the creation of the Internet. In both cases, things went badly. Even the subprime crisis of 2008 implied an innovative financial product that led to the biggest global recession since the Great Depression.
Troubling similarities
Today, it is Bitcoin and, more generally, the market crypto-currencies built, with its quirks, on the innovative technology of the blockchain, who promise to change the world. However, Bitcoin and, more broadly, the cryptocurrency market have close similarities to the recurring themes common to the most important speculative bubbles in history: the frenetic price developments, the irrational behavior of investors, fraud and the difficulty of valuing assets are all characteristics.
The parallel with the bubbles related to mass technological innovations suggests that Bitcoin and the rest of the cryptocurrency market are not different.