Bitcoin: is it a bubble waiting to burst or a good investment?
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Updated December 11, There's so much to choose from when it comes to behaving badly or, if you're looking for excuses, irrationally. Of course, there are always the usual suspects, most of which unfortunately are frowned upon by health professionals. But — and this could be right up his alley — from an investor viewpoint, perhaps Professor Thaler should look at bitcoin. For not since the dotcom boom, or our very own housing market, has there been a better opportunity to abandon any form of common sense.
Maybe that's a bit harsh. Lots of people make a great deal of money out of trading on the stupidity of others. And perhaps there is an element of rational thought in trying to capitalise on an asset bubble. You just don't want to be caught holding the fireworks when the fuse runs out, when everyone realises at pretty much the same time that they've been stupidly paying way over the odds. Clever though it may be, it is an asset that is totally unregulated.
No-one knows who is behind it or even the real identity of its founder, the mysterious Mr Satoshi Nakamoto. As such, its value neither is tied to anything tangible nor, unlike traditional currencies, is it guaranteed by anyone.
For those reasons, it has been the currency of choice for those involved bitcoin bubble makes dot com look rational less than legal activities. Then there is security. Given it exists in the ether, storing the virtual currency has thrown up some challenges with some high-profile thefts from bitcoin exchanges. Many of those "investing" have no idea about the structure of bitcoin, how it works or the technology behind it.
They've abandoned all rational thought in the hope they can get on board what appears to bitcoin bubble makes dot com look rational a sure thing. Usually, when it comes to investing, there is some kind of benchmark used to value an asset, such as profit, rent or dividend. People often disagree over the value of the benchmark; whether a share should be priced at 10 or 15 times its dividend.
In the case of bitcoin, there is no benchmark at all. Those jumping on board merely are buying bitcoin because the price is rising. For generations, long before the greed is good mantra, it's been drilled into economists that we always act in our own best interests and that we'll behave in a perfectly bitcoin bubble makes dot com look rational manner bitcoin bubble makes dot com look rational achieve that.
It's so ingrained in the discipline that it forms the basis of hugely complex mathematical models that attempt to explain and predict how an individual or an economy will react to certain events. Plug in a few numbers on say, tax changes or interest rates, and bingo, the model will predict exactly how bitcoin bubble makes dot com look rational all react.
The reason economists are wrong so regularly is that human beings, far from being rational, instead are unpredictable and often, deeply flawed.
Rather than examine all the evidence and carefully weigh it up, we often look for information that merely backs up our existing beliefs or, even worse, just react to the last thing we heard.
We care more about avoiding losses than making gains. And given we're social animals, we herd. If we're not trying to outdo those around us, we're desperately trying to be just like them. So when everyone's buying uber-expensive houses with oodles of cash borrowed at the lowest interest rates in the history of mankind, pushing prices even higher, we're tempted to jump on board. It may be overhyped by its enthusiasts and demonised by establishment players on Wall Street, but there is something bitcoin bubble makes dot com look rational behind the cryptocurrency.
The devotees firmly believe that these new currencies — of which bitcoin is the biggest — will usurp traditional banking and do away with central banks, thereby creating a truly global medium of exchange. Given the extent to which the developed world countries have manipulated and debased their currencies in the wake of the global financial crisis, through money printing and extreme interest rate policies, there is every bitcoin bubble makes dot com look rational that at some point in the future, a dominant global currency may emerge.
While the cryptocurrency has yet to become legitimate, bitcoin already has revolutionised much of the global business world courtesy of the incredible technology that underpins it. Its ledger keeping and transaction technology, known as blockchain, already has been adopted by some of the world's biggest banks and last week was taken up by the Australian Securities Exchange for its trading and settlement. While this does add a sliver of legitimacy, it's worth noting such exchanges will trade anything that exhibits volatility.
Remember too, that trading in synthetic debt instruments during the lead-up to the global financial crisis only exacerbated the debt implosion of In a way, this boom has been engineered. There are, apparently, only 21 million coins and, if the mysterious founders can be believed, there will only ever be 21 million. The coins are issued to those who allow their computers to be used to build the blocks on the chain, to allow transactions to proceed.
In the early days, this was relatively easy to do and you didn't need a great deal of computer power to do so. Now, however, it's a different story. The amount of computer power required is huge and so the effort required to extract or "mine" bitcoin bubble makes dot com look rational coin is far greater.
That's one argument to justify the recent price surge. But that pales into insignificance with the sheer volume of new and inexperienced players lured into the market by the prospect of vast riches.
In a completely unregulated market with no protection for investors, however, the opportunity for price manipulation is huge and many believe the market has been subject to enormous pressures from large players. It's a heady combination; uninformed investors in an unregulated market with no rules, acting on little disclosed information and with no bitcoin bubble makes dot com look rational protection.
First posted December 11, If you have inside knowledge of a topic in the news, contact the ABC. ABC teams share the story behind the story and insights into the making of digital, TV and radio content. Read about our editorial guiding principles and the enforceable standard our journalists follow. England is proving more and more it has what it takes to finally win a second World Cup, but watch out for France. As revealed in our Power Rankings, Les Bleus are priming as the ones to beat.
By business editor Ian Verrender. Many of those "investing" have no idea about the structure of Bitcoin, how it works or the technology behind it. What's the worst that would happen if the crypto 'bubble' bursts? The digital currency making millionaires. But don't spend your bitcoin on beer. This Nobel winner can explain why bitcoin bubble makes dot com look rational terrible with money. A digital cryptocurrency It operates on a decentralised peer-to-peer network, with no central authority or government backing They can be bought with fiat currencies like Australian dollars from online exchanges or created through mining.
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