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In February 1637, a single tulip bulb sold for more than 10 times the annual income of a skilled craftsman. Very shortly after the peak, the price collapsed dramatically. The build up became known as tulip mania. An article in the “Quarterly Journal of Austrian Economics” used the term to refer to large economic bubbles when the price of an asset seemed unrelated to the asset’s intrinsic value. Numerous scholarly articles and books argue about the causes and consequences.

Is the current meteoric rise of the price of bitcoin a case of tulip mania? Some say so, and that bitcoin has no intrinsic value. In late October, I wrote the total market capitalization (value) of all cryptocurrencies exceeded $150 billion. As of this writing on Friday, December 8, about 40 days later, the market cap of bitcoin alone exceeds $250 billion. I have been writing about bitcoin in this blog for four years, but there was rarely anything in major publications. Today bitcoin was on the front page of The Wall Street Journal and major coverage appeared in The Economist and most other major publications. White House economic adviser Gary Cohn said he and other administration officials are watching the price closely.

The total of all cryptocurrencies is still a drop in the bucket compared to the value of all forms of money in the world, which is approaching $100 trillion. Is bitcoin for real? Some experts are saying no. Some who say bitcoin has no value are threatened by it. Large banks collect billions in fees for money transfers, credit card processing, and numerous other services which could be done much more efficiently with digital currencies. Many governments in the world like to control their currency, but the people often don’t trust those currencies. With digital money, you are not trusting your government, you are trusting the mathematics of encryption.

To me, it looks like the Internet of 1995. Bill Gates said, at a 1994 conference in Paris where I was also a speaker, the Internet was interesting, but not for business. He said it was slow, unreliable, and insecure. Some IBM executives saw the Internet as a threat to its proprietary networking business which at the time was a very profitable one billions dollars per year. I argued the Internet would replace all proprietary networking, including that of IBM. Enthusiasm and pessimism about the future of the Internet were both running rampant.

I see cryptocurrency as the future. Does anyone think we will be exchanging paper money and metal coins 20 years from now? I don’t. How about 10 years, or five? Startup companies all over the world are innovating with blockchain technology, the underlying infrastructure which enables bitcoin and other cryptocurrencies to work. Digital payments and cryptocurrencies are both gaining momentum. It is right in front of us. Apple Pay, Samsung Pay, Chase Pay, Walmart Pay, Zelle, Paypal, and many others are enabling payment from mobile devices. I see adding cryptocurrencies to the mix as a logical extension.

With more than 1,000 cryptocurrencies out there, will one or more of them emerge as better and cause the demise of bitcoin? It is certainly possible, but I do not think so. For those old enouogh to remember, the Beta video tape format was superior to the VHS format. Later there was a secure web protocol called shttp. It was superior to https, which is what we all use today. In both cases, it was the grass roots which dominated and held on. In other words the momentum of VHS and https was so strong, it could not be reversed, even though there were better solutions. This is why I see bitcoin continuing to be dominant. 

One of the criticisms of bitcoin is the volatility. That may change very soon. At 6:00 p.m. EDT on Sunday, December 10, the start of Global Trading Hours, Cboe Futures Exchange (CFE) will begin offering traders a way to buy and sell bitcoin futures. The Chicago Mercantile Exchange (CME) will follow suit the following Sunday. Those who see bitcoin as over-priced will be able to bet against it. The introduction of futures contracts could have a stabilizing effect on the price of bitcoin. This in turn could encourage more retailers to accept bitcoin. Whole Foods eGift Cards are now available from $5 to $500 at eGifter.com. You can visit the website and purchase the cards with bitcoin. Regional airline carrier Surf Air, the “all-you-can-fly” private airline, announced late last week travelers can pay for their seats with bitcoin through a mobile app. If volatility does decline and if fees are trimmed, the giants of retail may offer plans to accept cryptocurrencies. We could be on the verge of a shift to a digital economy where cryptocurrencies, now at their volatile infancy, could enable more secure, private, verifiable, efficient, paperless transactions.

Disclosure: I am an investor in Coinbase and in Bitcoin. I am not recommending anyone invest in cryptocurrencies.