Bitcoins, Bubbles and Big Brother

“It’s better to be six months too early than a moment too late”

They were words of advice to me from one of the most successful stock market investors I have ever met.

He has passed away since then but this, and many other insights he shared, will stay with me forever.

It’s good advice for any investor (or politician) and particularly apt for the new ’crypto’ enthusiast.

For the uninitiated, crypto is a term for digital currencies that have been created outside government using ‘blockchain’ technology.

Perhaps the best known brand is Bitcoin.

Bitcoin has gone from being a hobby for nerdy enthusiasts (when it was valued at a fraction of a cent) to being the latest investment bubble for the bellhops. It recently traded in excess of $19,000 with one expert predicting it could hit US$100,000 this year.

It is true that some people have made millions – if not billions – of dollars from Bitcoin, but I suspect a great many more will lose it all when the bubble bursts.

Cryptocurrency has become the modern day version of the tulip bulb mania from the 18th century.

People are buying it (for fear of missing out) when their only hope of profit is to find someone to purchase it from them at a higher price.

This is known as the ‘greater fool’ theory.

There are now hundreds of virtual currencies springing up around the globe and people are piling in to get their slice of the action. The ABC is even publishing the Bitcoin price during their evening business bulletin.

I have no doubt this current boom will turn to bust and will be followed by the inevitable calls that ‘the government should do something about it’.

When people lose money they often lose any semblance of common sense.

The original appeal of cryptocurrency was that it existed outside of government authority. It will be ironic to hear those who lost their cash to crypto scams demand government protections for their loss.

I can’t see any government compensating Bitcoin busts but I can see them using the enthusiasm for crypto to push for their own digital currency platform.

Already around 83 per cent of all global transactions are digital in nature. Cash usage is in steady decline and it won’t be long before there are calls for cash to be withdrawn from circulation.

We have already had some government ministers say the $100 note should be withdrawn from circulation.

That is just the beginning.

There are appealing incentives for government to abolish cash. Currency has associated printing and storage costs. It cannot be tracked and can be used for illegal activities.

A digital currency costs next to nothing to create and store whilst it allows every transaction to be linked to a purchaser and vendor. This means it is virtually impossible to avoid tax and the revenue bonanza is the real appeal for governments.

The black economy is worth billions in Australia which means many are paying much less in tax than everyday Australians. Reducing that rort and enabling lower tax rates for all would ensure a level playing field and be good for our economy.

However, there is a significant downside to a purely digital transaction economy and that relates to privacy.

A purely digital future would enable government and business to track all your spending habits which should concern all those who cherish their privacy.

Many of us already undervalue the data that we freely share with social media giants about our browsing, viewing, driving and other habits (even conversation listened to by your smartphone) which helps those giants market products to us – and others with similar habits.

Imagine what government could do with the same data fed through digital currency.

George Orwell’s 1984 never foresaw that we – not governments – would purchase, install and even carry with us devices to monitor our thoughts and activities. Nor that we would freely give that information away.

So when the Bitcoin bubble inevitably bursts, watch for the signs of government responding to ‘consumer demand’ to turn everything digital under a veneer of convenience when there are far deeper and more serious implications.