Global Economy / When will the bitcoin ‘bubble’ burst?

The Yomiuri Shimbun

By Kensuke Nakazawa / Yomiuri Shimbun Staff WriterThe virtual currency bitcoin has recently seen its price skyrocket. A growing number of experts are saying the price increases are a bubble with little real economic foundation that will eventually burst and bring the price crashing down. Individual Japanese bitcoin investors — of whom there seem to be many — should take extra caution in handling the digital currency.

The price for 1 bitcoin in January 2017 was about $1,000, but it rose dramatically during the year, briefly touching a high above $19,000 in December.

To put this 19-fold increase in perspective, consider that from August 1995 — when Windows 95 was released — until March 2000, the Nasdaq composite index in the United States increased five-fold. This was the U.S. IT bubble.

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During Japan’s bubble from December 1986 to December 1989, the 225-issue Nikkei average doubled.

These cases demonstrate that the recent bitcoin price jumps are extremely rare.

“Over the centuries we’ve seen bubbles,” said Grant Spencer, acting governor of the Reserve Bank of New Zealand, the country’s central bank, on Dec. 10, 2017. “It looks remarkably like a bubble forming to me.”

In September, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said, “It’s worse than tulip bulbs,” referring to the so-called tulip mania (see below).

Bitcoin originally became popular because it allowed users to make quick payments with low remittance fees. The digital currency’s popularity was also attributable to its similarity to gold in that it is scarce, having a supply cap and requiring effort to obtain newly issued units. These factors are believed to be the source of bitcoin’s value and to have brought about its price jumps.

Role as currency receding

However, such reasoning is becoming less convincing.

In some cases, domestic bitcoin remittance fees have ended up being higher than bank fees. This is because the fees are denominated only in bitcoin and have gone up along with the price of the virtual currency.

For example, the major Japanese bitcoin exchange operator bitFlyer Inc. charges a remittance fee of 0.0004 bitcoin, which converts to about ¥800.

Larger volumes have increasingly resulted in more time being required to complete transactions such as remittances and payments. A transaction normally takes 10 minutes or less, but on some days the average is over 20 minutes.

Above all, many people are holding onto their bitcoins and waiting for the price to go up rather than using them for payments, given its price increase. Its role as a currency is receding considerably.

Its scarcity value is also looking uncertain. From summer to autumn 2017, “Bitcoin Cash,” “Bitcoin Gold” and “Bitcoin Diamond” branched off from bitcoin.

These new virtual currencies were like cells that had divided and now had their own values. Some bitcoin owners can receive the new currencies, and people are purchasing them in anticipation. Even with supply caps, the way they form and proliferate gives the impression of alchemy, of something created from nothing, especially with such names.

Wild speculation

But why did bitcoin prices continue to rise despite this?

The prices of financial products normally fluctuate for one reason or another.

For example, stock prices can be explained to some extent by expectations for the issuing companies’ performances, as can fluctuations in currencies like the yen or dollar by looking at the overall economic situations of their respective countries.

However, the value of bitcoin does not reflect the performance or economic situation of some company or country. No government or company guarantees the value, and there is no assurance that it will always be convertible to yen or dollars.

Many countries including Japan and the United States keep gold as a foreign reserve, and recognize its value. But the position of the Bank for International Settlements — an institution composed of central banks — is that virtual currencies have “zero intrinsic value.”

Considering all of this, it is hard to find a logical reason for why the price of bitcoin continued to rise. What brought the price up was people’s expectations that it would go up even more.

Takashi Hiroki, chief strategist at Monex Inc., said: “Individuals buy when price fluctuations accelerate, regardless of logic or theories. When prices increase, people buy again, and the pace speeds up. This is classic speculation. We now have a bubble as people are speculating wildly. The bubble is going to burst at some point.”

40% of transactions in yen

When bitcoin transactions are divided by currency, the yen makes up about 40 percent of all transactions. Many individual Japanese investors are rushing into this roller-coaster of a market, and people unfamiliar with investment run the risk of suffering big losses.

Based on “addresses” similar to bank accounts, there are approximately 25 million bitcoin owners. About 150,000 owners, or 0.6 percent of the total, have at least 10 bitcoins. However, the amount owned by these 150,000 makes up 87 percent of the total number of bitcoins, meaning the majority is owned by a very small number of users.

For this reason, the price of bitcoin can easily fluctuate dramatically when just a few major investors buy or sell.

On the other hand, the number of smaller investors with 1 bitcoin or less has increased since November 2017, when the price topped ¥1 million. Many of these people are believed to have purchased their bitcoins at a high price.

Satoru Kado, a principal economist at Mitsubishi UFJ Research and Consulting Co., said: “If major investors start selling, a considerable number of small investors will lose out. The price could also go down even further while they’re trying to sell.”

It is difficult to predict how the bitcoin market will fluctuate from now on, but there is no mistaking the fact that it is becoming considerably capricious and unstable.

Prof. Naoyuki Iwashita of Kyoto University said: “Whether [the price] goes up more or comes crashing down tomorrow, it won’t be surprising. Only God knows.”

Investors need to bear this in mind.

■ Turip mania

A period of speculation in tulip bulbs in the 17th-century Netherlands. Rare types of tulip were the objects of futures trading. At the peak of the frenzy, the price of a single bulb was said to be enough to buy a magnificent house with a garden in Amsterdam. A number of ordinary people such as bricklayers and carpenters became caught up in the trading. However, bulb prices crashed in 1637, bursting the bubble.Speech

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