The Great Bitcoin Crash Of 2018

It costs hundreds of dollars to mine a bitcoin. Therefore a bitcoin is worth hundreds of dollars.

It costs approximately zero to send bitcoin to anybody anywhere in the world, so bitcoin will take over from traditional money transfer systems such as Western Union and PayPal.

Like gold, the supply of bitcoin is limited, which gives bitcoin intrinsic value as a store of wealth.

Some very clever and some very rich people have invested in bitcoin so it must be a good investment.

So why does Warren Buffet believe bitcoin is a mirage?

If you spend millions of dollars mining camel coprolites in the Sahara such that each specimen costs hundreds of dollars, does that mean each is worth hundreds of dollars? Would you pay hundreds of dollars for camel crap? So why would you think a bitcoin is worth hundreds of dollars just because that's what it costs to mine one?

It costs approximately zero for a bank or PayPal to transfer money anywhere in the world. They charge you a hefty fee because they offer services around this transfer: user-friendly interfaces, fraud insurance and so on. And profit of course. If you want similar services around a bitcoin transfer (which non-geeks do) you'll pay a similarly hefty fee.

Gold has practical uses. Even at $1300 gold is used in industrial applications. Even at $1300 people like to wear it. Bitcoin has no corresponding practical uses. There's nothing that bitcoin can do that can't be done with (free) bits and bytes.

Very clever and very rich people invested in the South Sea Company. Very clever and very rich people invested in Wall Street in the run up to 1929.

One must not underestimate the lure of the mirage. Men will crawl across scorching sands certain of the reward. With bitcoin it is only a question of when the mirage will evaporate and what its price will be just before it does.

High though its value currently is that may be but a foothill. As yet, middlemen have no way of making money by persuading the great unwashed to invest in bitcoin. That could change if Bitcoin investment vehicles such as ETFs begin to take off, though the risk is they become the modern day equivalent of 1920s investment trusts: investment mirages pumped to incredibly highs, often with borrowed money, that played a big part in the 1929 Wall Street crash.

Once bitcoin ETFs begin to rise and attract mass media attention it really could be the South Seas Bubble all over again. Every middleman in town making handsome commission by persuading John Doe to sell his boring investments and instead invest in bitcoin.

Ride the wave and sell when your tabloid newspaper has bitcoin's spectacular rise as its headline. But don't put all your money in and don't borrow to invest - by definition almost nobody sells before a crash.