Bitcoin: How Far, How Much?

The price of Bitcoin reached $11,320 on Monday, December 4th, which is twelve times its price at the beginning of this year and more than thirty times its price at the beginning of 2016. If we go further back to 2011, the price of Bitcoin has increased more than thirty thousand times over the past seven years. In other words, if someone had invested just one hundred dollars in Bitcoin at the start of this seven-year period, they would now have a fortune equivalent to three million dollars. With this dizzying growth, Bitcoin has become the most astonishing financial and monetary phenomenon of the second decade of the 21st century. International economic circles, major academic centers, and, most importantly, central banks have been left astonished by the surprising emergence of cryptocurrency. Is it a repeat of the 'Tulip Mania'? There are many who see the end of Bitcoin as near and consider its astonishing rise to be a bubble that will burst sooner or later, leaving its holders in ruin. After all, a tree will never grow to the sky, and a fountain, after rising, will inevitably fall. The Bitcoin phenomenon reminds critics of an event that occurred about three hundred and eighty years ago in the Netherlands, recorded as the first crisis caused by a false bubble in the history of the world economy. This is the 'Tulip Mania,' which has recently been raised in several media outlets worldwide (including the December 5th issue of the French newspaper Le Monde), posing the question of whether we are witnessing a 'Bitcoin Mania' today. With this dizzying growth, Bitcoin has become the most astonishing financial and monetary phenomenon of the second half of the 21st century. International economic circles, major academic centers, and, most importantly, central banks have been left astonished by the surprising emergence of cryptocurrency. In the 17th century, the Netherlands, then called the 'United Provinces,' played a pivotal role in the Western European economy and part of the world, a role that later transferred to the British Empire and then to the United States. In this wealthy and powerful country, for reasons that are still not entirely clear, the price of tulip bulbs suddenly soared, and countless people turned to buying them for easy access to sudden wealth. Of course, this increase only pertained to bulbs from which two-colored tulips would grow, while single-colored flowers remained relatively cheap. Tulip bulbs were not a product that could be quickly supplied. From planting seeds to producing a bulb that would lead to the growth of tulips took a long period, longer than what is possible today due to scientific and agricultural advancements. In a short time, demand for two-colored tulip bulbs surged, while the supply of this product remained relatively low. As a result, within three years, the price of fine tulip bulbs increased by 5,900 percent, and the price of the most premium ones rose to four times the annual income of a working-class family. This feverish craze subsided as quickly as it had begun. The price of each tulip bulb fell to one-hundredth of what it had been, and many people were left destitute. Is Bitcoin the tulip bulb of the 21st century, and will its mania soon subside? Some of the world's leading economists look at Bitcoin with great skepticism and warn of the possibility of its bubble bursting in the not-too-distant future. Jean Tirole, the famous French economist who won the Nobel Prize in Economics in 2014, describes Bitcoin as a 'complete bubble' and expresses his concerns about this phenomenon. In his view, Bitcoin is not backed by anything, unlike legitimate currencies that rely on the economic power of countries or gold, which has intrinsic value. As trust in Bitcoin wanes, its value could fall to zero, and holders of this digital currency have no safety net. Moreover, Bitcoin lacks the social role of traditional currencies and cannot serve the budget of a country, which is the foundation of financial unity in a national community. A new chapter in the international monetary system? On the other hand, there are many supporters of digital currency who predict a bright future for Bitcoin, to the extent that they speak of the emergence of a new chapter in the history of the global economy and international monetary system, viewing this currency as a new step toward freeing humanity from the oppressive control of governments and central banks. Even if we do not share in these optimistic assessments, one thing seems certain: Bitcoin can no longer be taken lightly or ignored. The events of the past two decades have taught us that great scientific and technological revolutions have created a very fluid world, accelerated the movement of history, and brought what belonged to the realm of miracles in the not-so-distant past into the daily lives of people. How many could have predicted the consequences of the emergence of the internet or social networks in all aspects of life? Or the earthquake that artificial intelligence will bring to human civilization in the next ten or twenty years? The economy, including the monetary system, also faces new arenas that previously had no place in economic literature and had not even crossed the minds of economists. Beyond the fate of Bitcoin, a monetary system based on the absolute power of governments and central banks cannot be eternal. The problems arising from the emergence of Bitcoin and its shocking ups and downs, along with the speculative conjectures surrounding it and the bubble that has formed, are undeniable. There is also no doubt that digital money can be used for money laundering, financing terrorism, tax evasion, and smuggling. However, all these issues, which we cannot doubt their reality, should not overshadow the intellectual foundation of digital money. The question is: should money remain in the monopoly of the government and central bank, even when experience has proven that they can, whenever they wish, devalue money by flooding the market with unbacked banknotes, effectively reaching into people's pockets? Let us not forget that during World War I, the warring governments flooded the market with banknotes to finance this great slaughter, taking both the youth and the money from families. Or in a poor country like Zimbabwe, the aging dictator flooded the market with so much money that inflation reached millions of percent. Or in Iran, the Islamic Republic has brought the national currency to such a state that people waste time and energy counting its zeros. Or in Venezuela, Hugo Chavez and his revolutionary Maduro have wreaked such havoc on the Bolívar that the inflation rate in this country currently fluctuates at the threshold of a thousand percent and is projected to approach two thousand percent next year. Is it right that hundreds of millions of people in such countries constantly worry about their money and witness the decline of their purchasing power from dawn to dusk, with an abacus in hand? Even in advanced industrial countries, which pride themselves on the independence of their central banks, these institutions are not averse to manipulating money. After the financial crisis of 2008, central banks used people's money to rescue struggling financial institutions and injected thousands of billions of dollars into the economy to prevent a repeat of the great crisis of 1929, while governments also incurred hundreds of billions of dollars in new debt, which future generations will have to bear. In this context, there are also those who rise against the power of governments and central banks and challenge their inability to provide a quality currency that preserves the purchasing power of the people. Digital money, of which Bitcoin is the most important symbol, claims to ensure individual freedom against the power of the state, which arbitrarily decides the value of money and people's savings, which have been earned through a lifetime of effort. Here we have outlined the reasons of both groups, in denial or affirmation of digital money in general and Bitcoin in particular. At the end of this article, we know that many questions remain unanswered, including the question of how far the rise of Bitcoin will continue. The author does not know the answer to this question, but considers the intensity of this rise to be unhealthy and abnormal. Such severe fluctuations for the world's most important digital currency are a sign of a 'childhood disease' that will certainly claim some investors as victims. Nevertheless, we reiterate that reliance on this weakness should not serve as an excuse to deny the importance and dimensions of the emergence of this new experience in the global monetary system. This new revolution must be taken seriously. Fereydoun Khavand, an economist, economic analyst, and professor of economics in Paris, France.