When the final bubble pops

Published

I mostly follow Warren Buffet philosophy regarding investing. I don’t invest in things I don’t understand, and cryptocurrency is no exception.

If you have any interest in history you might find cryptocurrency quite similar to the Dutch Tulipenmanie. The deceptively simple nature of bitcoin and its cousins makes it easy for anyone to join the . But these kind of speculative markets tend to have a upper bound of growth. I haven’t seen anyone explain how bitcoin might to collapse . I’ve been thinking about it and this is how I see it go down.

The main vulnerability with bitcoin is that is inherently index to fiat currency through exchanges. Without these open exchanges it would be extremely hard for bitcoin to worth as much as it is, because you would had to rely on barter. Here lies the problem. While the market size for the bitcoin market is small, the rise and fall of the market only affect a small set of people and has virtually no effect on anyone’s economy, only those who accept to participate in it. But since the gains are huge and the cost of entry is small more and more people are entering the market. For the most part financial firms have stayed away, but with payouts high as they might be, they are starting to move in.

Initially these firms will segregate these profits to high risk pools, meaning they are isolated from the whole firm risk profile. But there might be something in the future, maybe a recession, maybe the US government decides to invade some country, which causes a financial crash. That will cause people in these financial firms to make risker moves (most likely to maintain the same bonus level that they are used to) and someone somewhere will tie the regular economy with the bitcoin market (With some bad luck even through layers of derivative products). Since this ties both markets, there will be a point where bitcoin will cash as it always does, but this time there will be an economic crash attributed to the volatility of the cryptocurrency market.

Governments will blame financial firms which will do everything to shift blame to the unregulated cryptocurrency market. Pressured by the people who lost their savings because of some “silicon valley greedy basterds”, the government will decide to intervene. Since the entire cryptocurrency is decentralised, they will have to go after the exchanges. One of two scenarios will happen. Either government will impose heavy controls on the value of crypto currencies, making the entire dream of unregulated currency to die, or my personal opinion, financial companies will come in and say that uncontrolled crypto is inherently unsafe, but financial firms have the same kind of assets with central control, like ripple. This will cause the government to forbade all unregulated crypto currencies at the exchanges and only allow coins with some kind of control, making bitcoin and the like valueless. Financial firms will love this because this way they will have created a currency, with government approval, fully controlled by privates

Anyway, I’m still not investing in any of this shit.