As the price of Bitcoin tops US$10k for the first time, Hamilton Hindin Greene's Jeremy Sullivan warns human nature hasn't changed since the 17th century, it has just moved on to a different tulip

By Jeremy Sullivan*

A colleague of mine was recently on his way to the airport when he struck up a conversation with the driver regarding Bitcoin. Very pleased with his returns to date, the driver proclaimed the end of traditional currencies and the endless upside potential of Bitcoin; and cryptocurrencies in general.  

[As we publish this article Bitcoin has just broken through US$10,000 on the Coindesk platform for the first time, pushing the local price to NZ$14,537. Ed.]

Bitcoin is a decentralised digital currency which was created to solve the problem of needing a central depository, such as a bank or credit company, to facilitate payments. Think of it as a peer to peer payments system. Bitcoin needs to be separated from its underlying technology or code called ‘Blockchain’. 

Blockchain is the technology or algorithm which was created to keep a ledger of all the transactions electronically to verify their authenticity and safeguard against hacking or other malicious activity. 

Blockchain itself has many potential applications including faster, cheaper settlements in financial services, electronic voting, or even the transfer of ownership for things like cars, boats or artwork. This in my view is where the value is within the cryptocurrencies, the technology behind them. As at the 27th of November 2017 there are 1324 cryptocurrencies and growing. What makes Bitcoin special compared to the other 1323 you can choose from? The answer is nothing, except that it was first.  

Bitcoin has so far proved to be a good gamble, but it is far from investing. There is no cash flow derived from the investment, unlike shares, fixed interest or property. It has no lasting unique value proposition, as it has been replicated 1300 times and counting, with little difficultly. 

What we have here is mania built on speculation. 

The earliest recorded speculative mania dates back to the Dutch in the 17th century. At the peak of 'Tulip Mania', in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. The 1637 event was popularized in 1841 by the book ‘Extraordinary Popular Delusions and the Madness of Crowds’, written by British journalist Charles Mackay. At one point 12 acres (5 ha) of land were offered for a Semper Augustus bulb.

Some may say, “Oh well it’s a bubble, but if I can get in before it’s too late I can still make a quick buck”. If this thought has crossed your mind you know for sure that you’re gambling. This is known as the ‘Greater Fool Theory’, where all you need is someone to be a little slower (or dumber) than you. Pity the person who is left holding the candle when the party is over. 

To use a well known quote from the Great Depression “You know it's time to sell when the shoeshine boys give you stock tips”.

Unfortunately human nature doesn’t appear to change all that quickly, it has just moved to a different tulip.  


*Jeremy Sullivan is an Authorised Financial Adviser at Hamilton Hindin Greene Ltd. This article represents general information and does not constitute personalised financial advice. 

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47 Comments

Price is might

Let’s take a brisk tour of the most exciting, confounding, lucrative and, yes, dangerous financial realm in recent memory: Bitcoin and its fellow crytocurrencies. Bitcoin, which fetched about $963 per unit on Jan. 1, changed hands at around $10,044 in mid-afternoon, good for a 944% return year-to-date. Over a five year period, its price has advanced by approximately 85,000%.

Jim Grant

Bitcoin is just not scaling. Transaction costs are up there with credit card fees and transaction processing delay is now in the hours. Therefore you can forget all those bitcoin ATMs and point of sale systems that were a buzz years ago. Bitcoin was meant to be fast, secure, low fees. Now bitcoin is much like shipping around gold bullion.

Maybe if the blockchain gets too large there will be a requirement for institutions to do the processing of transactions. Wouldn't that be ironic.

https://www.businessinsider.com.au/bitcoin-mining-electricity-usage-2017...

"The amount of energy used by computers “mining” Bitcoin so far this year is greater than the annual usage of almost 160 countries...

That's slightly more energy than Africa used in 2005 to mine precious metals.
See page 10 https://pubs.usgs.gov/of/2011/1253/report/OF11-1253.pdf

Some people mine coins like Ethereum to heat their houses so I wouldn't say it's all wasted.

"Maybe if the blockchain gets too large there will be a requirement for institutions to do the processing of transactions. Wouldn't that be ironic."

Having seen a "mining" setup, I don't think we are too far away.

Have you not heard of the lightning network? I know its hard for most people but if you were aware of the layers being build on top of Bitcoin then you might understand its potential...

Nope. Just having a read now. Link for those interested: https://lightning.network/

its like the media and general public are about 2-3 years behind the technology developments of Bitcoin.

Interest.co only took 8 years to get the Bitcoin price added to charts..

I guess the question for bitcoin 'investors' is how long will it last? It is definitely getting into the phase where the average Joe is thinking they are missing out and jumping in. I guess the question is how many more average Joe's jump in before the smart people pull their money and bring down the pyramid?

What's more interesting is that I don't even think average Joes are even jumping in yet. Only a subset of my tech-proficient friends have even bothered to buy in at all.

In terms of people who don't know anything about tech, I've found they've heard of it but have no idea how to go about buying.

When that demographic has easy access, then I think it'll start the hysteria phase.

That might be a NZ thing though, certainly not as easy as US or Europe where you just fill in your credit card details on Coinbase, as easy as setting up a paypal account.

They were doing a segment on bitcoin on the radio when I was driving home. Hauraki, not a news station.

Bitcoin is not going away. It’s the future and governments are worrying big time because if they can’t control the money supply then they lose some serious power. Guys like Jeremy Sullivan should be very nervous, as his industry will be finished in the future.

"It’s the future and governments are worrying big time because if they can’t control the money supply then they lose some serious power."

They don't control the money now.

Why are you so sure Bitcoin is the future when it is just one of an infinite number of possible currencies? Just because it was the first?

Any sovereign create a Fiat money also, does this make it worth anything? The answer is no. The value comes from the network and the users participating in the network.

Well I highly doubt the users of the NZD or USD are going to jump ship overnight. Granted it could happen over a fairly long period of time if the world moved to crypto currencies.
But I wouldn't be at all surprised if the users of Bitcoin disappeared overnight. I certainly know if I was sitting on some bitcoins I paid a few dollars for that were now worth $10,000 dollars, and if there was a bit of a downward blip in the price, I would sell, and I'm sure I wouldn't be the only one. It looks very much like a classic pyramid scheme.
No currency (even gold to an extent) has any real value, but some have many more reasons to be valued than others.

Also I'm not sure that bitcoin is actually a currency anymore. Are people really using it to exchange goods and services? What can you buy with bitcoin? If it isn't a currency, what is it?

1) One can probably assume that a lot of the inherent demand for bitcoin and cryptocurrencies comes from dirty money gives the blockchain is anonymous. Any real future blockchain may need to remove the anonymity. There must be methodologies where the user ID can remain anonymous and only be specified under a search warrant. Other recent articles have also pointed to far more efficient blockchain methodologies than the one underlying bitcoin.

2) A scaled chart of bitcoin vs other bubles was published recently. GIven bitcoin's now at $10,000 it will clearly rank as the largest bubble in history in one defined medium.

My thoughts are that Bitcoin (Blockchain crypto currencies) will never replace money for the simple reason that anyone in theory can create one.

At best they are an investment or more likely a commodity (the term "mining" is a dead give away)

To be fair anyone can create fiat money: e.g. monopoly money. people just wouldn't use it because the community doesn't regard it's value.

"What makes Bitcoin special compared to the other 1323 you can choose from? The answer is nothing, except that it was first."
Fake news
If the Author does not understand the differences between Bitcoin and a Sh1tcoin then he hasn't done his research.

Yep. Disgruntled and envious financial adviser.

This whole Bitcoin thing COULD end in a spectacularly bad fashion .

What , apart from limited supply, is driving the price , and who controls the supply , and how is it regulated?

It can never replace traditional currency without all the rules and regulations , checks and balances and safety nets ( like lenders of last resort) that we have in the modern monetary system developed over millenia

The current Bitcoin price would indicate a supply shortage or constraint , and who controls supply ? What is the supply of bitcoins , and how do we know that is "the total supply" .

Without transparent regulation , I would not go anywhere near this thing .

I would never accept payment for anything in Salt or Tulips or railroad bonds , amulets or dotcom shares .

Bitcoin has all the features of a really smart ponzi scheme ,except that with this one , there is no one to arrest if it crashes.

Transparency is actually one of the benefits of blockchain (the underlying tech) over traditional fiat currencies. Bit too difficult to lay out in a simple comment, beyond the fact that because the ledger is shared by all, you can't cheat the ledger. Everyone has a record of who owns what and the transactions that have created the present state.

What is driving the price - demand like any other money or product
Who controls the supply - this is regulated by maths and code and is distributed according to the work(POW) you do on the network via hashing(mining)
I agree it wont replace traditional fiat money but it doesn't need to. It just offers an alternative to those that want it.
Smart Ponzi scheme? either do you don't understand how bitcoin works or you are to lazy to find out.

Whats driving the demand.. the price increase. Once enough people decide to take their profit and the price starts heading the other way in a sustained way the demand evaporates too. Then you are left with limited supply and little demand.. which according to market principles means low price. I'm not sure where or when, but there will be a crash then an eventual stabilisation at a much lower price level.

If miners decide that it's not worth the power to mine bitcoins then they will eventually stop with the risk of the frisbee on the roof scenario when the next block never gets mined. No transactions go through if the next block is not mined.

Well said by an ex banker

What about payment in cotton backed bonds? It's not like the North would block sea access to the Confederate States, and deny you access to your cotton.
https://opinionator.blogs.nytimes.com/2013/01/30/the-cotton-bond-bubble/

Harcourts Bitcoin

I don't get all the negativity for something most of us know nothing about. At first yes, it's challenging how we accept the world. But we already for the most part live in an fully electronic financial system. As society implements more and more automation every day are we really surprised a move to completely automate our financial and economic systems is such a crazy idea?

That said I wouldn't be selling my house (i'm safe I live in Auckland and my parents haven't bought me one yet) to invest everything in a single currency. But thinking about the frontiers of a new decentralised world and how to benefit from it without turrets yelling bubble would benefit us all.

The issue with blockchain as currently implemented is simple: as it relies on a 'distributed ledger' with multiple participants (everyone who has ever transacted along a given chain), it might grind to a halt because of two factors:

  1. the need to communicate, validate and incorporate every transaction at every participating node
  2. the need to generate the correct key in order to locate the block in the chain - a mathematical calculation consuming significant horsepower

In short, it may not scale as presently used. This tends to rule out the notion that everyone everywhere can use it to get those coupla bottles of milk on the way home. Too many small transactions....

There's a good explanation here (Deloittes, not a Dark Webber): https://www2.deloitte.com/ch/en/pages/strategy-operations/articles/block...

Private blockchain, OTOH, has a lot of possibilities. Vertical supply chains (think, FMCG like Countdown, or Fonterra) as well as banks, for internal purposes, are obvious users. They won't encounter scaling issues because of the nature of their internal applications: confined, low volume/high value.

Interestingly, in a two-decades-old book https://www.amazon.com/Sovereign-Individual-Rees-Mogg-published-Hardcove... - 'cryptocurrencies' are discussed as having the Hayekian advantages of competing, private currencies:

  • Lack of inflation because the value thus stored is not open to Gubmint manipulation, taxation or other interference
  • No possibility of counterfeiting
  • Low transaction costs (they had not foreseen the scaling issue...)
  • Inherent protection against predatory taxes
  • Direct investor control over capital
  • Better resource allocation, as the allocation will be under the direction of investors with skin in the game, rather than by Gubmints (and then after much frictional loss)

Now this was a rosy, pre 9/11 world in which the authors wrote the book. But still.......it's rather poignant that in the Preface, this sentence occurs:

Society is vulnerable, like the plate glass sky-scrapers of the World trade Centre.

Then, as James Howard Kunstler http://kunstler.com/clusterfuck-nation/exit-sign/#more-8657' gleefully points out. there's Mt Gox....https://www.wired.com/2014/03/bitcoin-exchange/

But, just maybe, (and as with everything new, there's an initial Cambrian Explosion https://www.livescience.com/28098-cambrian-period.html of body forms which are winnowed by the stern taskmistress of Darwin/Gaia), having multiple, competing non-Gubmint-controlled currencies is actually not a Bad Thang?

Keep in mind bitcoin is evolving constantly so I would imagine these issues will be solved in the future.

As an Australian commentator wrote - Would you rather own all of Bitcoin or the entire Australian listed property market with change ?

As an Australian commentator wrote - Would you rather own all of Bitcoin or the entire Australian listed property market with change ?

Has anyone looked in to why Bitcoin has sky rocket in value in recent years? Having looked in to this a while back, I remember reading a business articles that pointed to the number of investors we mostly pouring in from mainland China.
The reason being thst it was a favored vehicle to transport their money out of China and by pass any regulations. At one stage in was up to 90% of Bitcoin investors. Now that their regulators are keeping a close watch, I wonder how much of this a build up of investment where everyone is now pilling in causing a Tulip Maina effect.

Remember China was the first country to talk of banning Bitcoin in favor if developing their own government run crypticurrency.

But if it was merely an exchange (to get their money out of china), there would be as many sellers as buyers and the value wouldn't have increased.
I think most people are holding bitcoin as an investment. This makes it almost useless as a currency - why would I ever spend my bitcoins if I know it will be worth more tomorrow. It is also pretty useless as a currency as there is very little you can directly buy with it.
So if it isn't a currency, what is it people are investing in?

But that's percicly my point. I think people are just investing for the sake of investing, keeping their existing investment positive.

The big danger is now that it can't be used as a currency transfer vehicle at least by mainland Chinese and now that China is looking to create it's government owned crypticurrency (And other countries are looking to do the same). It's likely there would be a big switch in investment, leaving Bitcoin high and dry.

So that's one major reasons why people should be cautious about investing in it.

Good take on this YT vid comparing digital assets and blockchain now to when the internet was first developing. People were initially unable to accept the technology, now everyone has a computer in their pocket. The early adopters were well rewarded then as they will be today. Tulip bubble? Dont think so its just getting started!
https://www.youtube.com/watch?time_continue=1&v=T2zH-T_hmLs

Fiat money is just a paper promissory note from the government. Do we trust the government, my personal answer is a flat no! I’m enjoying watching the likes of Jamie Dimon head of JP Morgan go on and on how Bitcoin will crash and disappear. He’s worried because he knows guys like him and his industry are finished. I’m enjoying listening to Bill Gates and Richard Branson who say it is not going away whatsoever as it is the future. Watching Obama talk about it was interesting, he was very alarmed as Bitcoin cannot be hacked and the government is losing control.

This is just the start.

Naturally, it is naïve to trust any government. Having said that, they rule and you can't just opt for a competing currency of your choice in day-to-day activity. Every form of money is arguably "fiat" by definition anyway.
Obama is not renowned for telling the truth, because if he was he'd acknowledge that government can outlaw Bitcoin tomorrow if they want to...

What if the technology underpinning this block chain, mining, exchange, cloud storage etc fails wholesale ?
Next Black Swan ? Coming soon ?

Governments and central banks are watching this space with interest and are already planning for monetary reform. In short, officially sanctioned cryptocurrencies (i.e. govt "legal tender") will rule in future. They are a way for government to exert even more control and supposedly avoid black market cash activity, etc, so they will be all in. The only question is when, not if, governments move to outlaw competing cryptocurrencies like Bitcoin, Ether, etc. So, invest with your eyes wide open to this imminent risk.

Since the price of btc reached 50 usd, I have heard warnings like this. Of course, in any investment, the past performance doesn’t guarantee the future performance. Like the economist from a real estate company on tv once said, it has multiplied 20 times. They will not pay you for the profit you could have earned.
Nz residential properties are also like tulip.