Why did the Dutch tulip mania of the 17th century collapse? What is the simple, fundamental reason? Because a house, which was then traded for a tulip bulb, can deliver much more utility than that bulb. Shelter and security are much more important than aesthetic pleasure. No amount of speculative enthusiasm could override this basic reality of unequal utility.
Bitcoin is, of course, not a tangible item that can deliver something directly. It is a unit in a system. But when people hold units in a system, the system delivers something to them; the more units they have, the more they get. Here, the fundamental reason for collapse comes from a discrepancy between that delivery and the price.
Yet in the case of Bitcoin, the system delivers nothing at all. Neither its pseudonymous creator, who designed the protocol for assigning these units, nor the network that maintains them in a decentralized database delivers anything to those who hold the units, no matter how many they accumulate.
Despite this, people are currently paying around 70,000 dollars for a single unit. To understand why this must collapse, it helps to consider how other systems deliver, and how that relates to the market.
A company that issues units in the form of shares delivers through dividends, share buybacks, or liquidation. If it can deliver one dollar per share in tomorrow’s liquidation, but that share is traded for 100 dollars on the market, the price cannot hold.
Commercial and central banks that issue monetary units deliver something either through their borrowers or themselves. Because they issue units as loans, borrowers deliver products, services, and labor to unit holders whenever they acquire units for loan repayment. If they fail in that repayment, banks themselves deliver by auctioning seized assets. If that delivery is a Toyota Camry to settle a 30,000-unit unpaid loan, no rational market would exchange a house for that amount. If it did, it would certainly collapse.
PayPal, which issues units of electronic money, redeems them; that is, it delivers fiat money in proportion to those units. A market that would pay above that redemption for one PayPal unit would also collapse.
In all these cases, it boils down to what the system can deliver. It is not about whether the system is fast or slow, centralized or decentralized, secure or insecure, scalable or limited, or any of its features. It is simply about how much it can deliver per unit. A market collapse follows when there is a discrepancy between delivery and price.
But in Bitcoin’s case, the delivery per unit is zero, and the price per unit is enormous. So the potential for collapse here exceeds anything we have seen before. That collapse will certainly come; it will be spectacular, and no enthusiasm for Bitcoin’s features will prevent it.
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