Sir Isaac Newton, a reason to buy or sell bitcoins?

Bitcoin has hit yet another high - passing $6,400, as markets prepare for its listing on the futures Market. Is there trouble ahead?

History tells us that bubbles happen - investors pile into a craze then become euphoric, reasons to doubt are dismissed as the words of old ‘stick in the muds’, and then the bubble bursts, fortunes are lost, and the ‘stick in the muds’ look smug.

And since Bitcoin is now to be listed on the futures market, meaning investors can bet on it rising or falling, the way is open for a new speculative frenzy.

And there is no shortage of wild predictions, people are even forecasting that bitcoin will rise above $20,000.

Maybe it will, but the higher rise the harder the fall.

Truth is, a misplaced sense of paranoia is behind the surge. Take these words from the Capital & Conflict Newsletter: “Every now and again a financial system is so corrupted…So broken…It has to go through a reset.”

The gist of the narrative continues like this: thanks to record low interest rates and quantitative easing, the money supply is debased, you can’t trust governments, therefore we need a form of money that can’t be subject to the greedy and corrupt control of government.

It says that the last time this happened in the UK was in 1699, when “the Royal Mint was in urgent need of a visionary… a man with the qualities of Sherlock Holmes and an extensive knowledge of metals and mathematics.” It continues: “They turned to Britain’s brightest mind – Isaac Newton.”

Newton was instrumental in a complete re-structuring of the money system, introducing a gold standard. The inference continues, we are at such a stage again, so we need the 21st century equivalent of a gold standard, namely bitcoin.

Here is the problem with such an argument: it is wrong.

A growing economy needs a growing money supply, without it the economy can get stuck. Bear in mind that back in 1699, economic growth didn’t happen. The UK did not see significant growth until the Victorian era, after the money supply grew thanks to the discovery of gold in the new world.

The reason why interest rates are so low and quantitative easing has nothing to do with corrupt governmens, is because there is a chronic shortage of demand - also called a global savings glut - world wide.

Paranoia is what gave the bitcoin boom its initial impetus. Now it is pure greed that maintains it, or maybe fear, as investors/gamblers fear missing out.

The bubble may not burst for a while. To understand why, consider the lesson of Joseph Kennedy - father of the assassinated president. He made his fortune after liquidating his stock in 1929, before in the infamous crash after a shoe shine boy asked his advice on what stocks to buy.

The bubble may not burst until the latter day equivalent of shoe shine boys jump on the bitcoin bandwagon.

But just recall, Sir Isaac Newton, the man who was instrumental in Introducing a gold standard, a hero of the bitcoinfraternity, was himself a victim of a bubble, losing £20,000 - a fortune for that time - on The South Sea Bubble.

Bitcoin fans may think that a tale from history involving Isaac Newton will repeat itself, but it may not be the tale they are expecting.