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Bitcoin, Litecoin, We're Well Into South Sea Bubble Territory Here

This article is more than 10 years old.

We have all the makings of a classic bubble here. Yes, Bitcoin has gone through $1,000 but that's not the real signifier of us being in a bubble. Rather, all of the other digital currencies are rising strongly in value as a result of Bitcoin's rise. And that does start to remind those who have read their economic history of the times of the South Sea Bubble. Do note that this doesn't mean that Bitcoin won't find a real world use  other than getting money out of China, nor does it mean that Bitcoin is either succeeding or failing. A bubble is a bubble though.

Business Insider has a part of the story:

According to that site, Peercoin, which now has the third-largest market cap among digital currencies, is up 22% in the past 24 hours. Peercoin's main feature is that it's based on a protocol which, though different from Litecoin's, achieves the same effect of preempting mining cartels from forming and gaining too much control over prices.

Namecoin, with the fourth-largest market cap, is up 70% in the past 24 hours. Its principal attribute is that it exists outside the regular Internet and therefore beyond control of The Internet Corporation for Assigned Names and Numbers (ICANN), the Internet's regulatory body.

The FT's Alphaville has this about the Litecoin price:

If that price were being driven by the greater acceptance of Litecoin then possibly fair enough. But it's pretty clear that it isn't, it's being driven by the rising price of Bitcoin. And that's a good signifier of bubble behaviour.

Recall what actually happened in the South Sea Bubble. That particular company was reasonably founded, legal, has a business model and even revenues. Then that speculative frenzy took over and the price rocketed: but that could still be explained by it having a plan, a revenue, a government monopoly and so on. And indeed, after the bubble burst the company survived for many more decades. It was what happened to all of the other promoted companies at the time as a result of that surge in the South Sea Company that defines the bubble mentality. And absolutely any company at all was indeed able to float and gain capital at that time. Even that famous one for a great purpose but no one to know what it is.

No, no one was being fooled by all of this: they knew they were in a bubble. But the thought was that you would be able to sell to the next (or, in the jargon, greater) fool after you'd made a bit of money in what was obviously a scam going nowhere in the long term. And as I say, that's the bubble part. That all crypto-currencies are soaring in value as a result of Bitcoin doing so is the signal of a bubble. Just as in the dotcom era all internet stocks soaring was a signal. Sure, there really were some great companies founded and financed at that time: Google , Amazon and so on. there were also any number of complete dogs like WebVan and so on.

Whether Bitcoin itself prospers is one thing: that all crypto-currencies are being speculated upon as if all will so succeed is very much bubble behaviour.