CRYPTOCURRENCY VALUE COULD MIMIC DUTCH TULIP MANIA.

CRYPTOCURRENCY VALUE COULD MIMIC DUTCH TULIP MANIA.

2017 will be remembered as 12 months in which the value of Bitcoin, the leading cryptocurrency, went from under $1,000 to nearly $20,0002 —a healthy return for the world’s some 3.5 million active bitcoin account holders. It is similar to the Dutch’s tulip. Between 1634 and 1637, the price of a tulip bulb in Holland skyrocketed 60-fold.

3 A single bulb equaled 10 times the annual wages of a skilled worker and with it, a person could buy a lavish home in Amsterdam. By that measure, a similar speculative fever could see the Bitcoin price rise by another order of magnitude in 2018. However, Bitcoin, like Dutch tulip bulbs, is currently functioning as a purely speculative asset and, hence, is unlikely to defy economic gravity over the medium term. When the bubble bursts, it won’t wreck any economy–just as the Dutch economy shrugged off tulips becoming just plants again.

Latecomers will lose money, but as always, lessons will be (re)learned. What will continue to matter is the evolution of the underlying distributed ledger technology.

At some point (not in 2018), this technology may be used as the basis for cryptocurrencies that can simultaneously function as a store of value, a medium of exchange and a unit of account. Until then, retail and commercial bankers shouldn’t worry too much about making Bitcoin-denominated mortgages.