This is a story of mania, panic, and crash. It’s not new.
Today’s market cap is roughly $150 billion. Averaged over, say, 3 million holders, that’s $50,000 each. Peanuts, if you belong to the 1%.
The trick is to kite the price to anywhere from 5 to 20 times the current level of $4,000.
The sales are essentially wash sales, as coins just go round and round. That’s why they’re coins, see.
Spectators – the victims – then want in, and the insiders pump and dump swimmingly, until the 3 million can get out with huge profits, at the expense of the latecomers.
The end is a classic Minsky Moment, when the latecomers try to sell. The algorithms in the trading platforms would ask: ‘To whom?’ And the price spirals to nothing.
Question for economists: Can the end trigger a financial or economic crisis? A dire scenario is that the latecomers’ loss results in bankruptcies and loan defaults, a retrenchment in purchases of housing and consumer durables, or in a general malaise in business and consumer confidence. Banks may fail if they finance bitcoin purchases.
With the benefit of foresight, monetary authorities will likely institute safeguards. Trading platforms are like banks, and will need adequate capital in case of an epidemic of ‘fails,’ which can happen if traders engage in short sales, or in margin trading. The Know Your Customer rule will have to be integrated into the block chain data base, and imposed by banks on customers operating trading platforms.
Of course, theoretically, since virtual currencies can function as money, all trading can take place outside the banking system. If that were the case, the ponzi won’t work: How would the victims’ money enter into the bitcoin system? The price would go up and down forever, but that’s all. It’s funny money after all.