In 1841, Charles Mackay wrote a very famous book that is mandatory reading for anyone in the investment industry.

It was called Extraordinary Popular Delusions and the Madness of Crowds and was a study of crowd psychology and mass mania with classic swindles, schemes and scams.

Probably the most famous example of irrational exuberance was the Dutch Tulip Mania of 1634-37.

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Tulips were so fashionable and so sought after that at their height, a tulip bulb was reported to have sold for 10 times the annual income of a skilled craftsman.

Some institutions are now suggesting that the Bitcoin bubble has probably eclipsed the Dutch Tulip Mania episode.

Bitcoin is a digital currency that has been created and put forward as a global way of paying for things, rather than using dollars, euros or pounds sterling, etc.
Seven years ago, you could buy 1 bitcoin for 10 cents.

Not so long ago, the price of 1 bitcoin hit $30,000, but the value has crashed somewhat since then.

It is still a pretty profit if you bought some bitcoins early enough.

Bitcoin is not the only virtual currency out there, but it is probably the best known. There are no coins or notes, and it is not controlled by any government or central bank; bitcoins only exist digitally online.

A bitcoin is created by computers doing what is called "mining", and they are exchanged, valued and stored using a revolutionary technology called blockchain.

According to Don and Alex Tapscott, authors of the book Blockchain Revolution: "The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value."
All sounding a bit far-fetched? Well, you might be surprised to know that the Australian Securities Exchange (ASX) has just become the first stock exchange in the world to adopt the use of blockchain technology to record shareholdings and manage the settlement of transactions.

ASX chief executive Dominic Stevens said blockchain would "enable our customers to develop new services and reduce their costs, and it will put Australia at the forefront of innovation in financial markets".

When bitcoin was first developed by Satoshi Nakamoto (only a pseudonym, and speculation is rife as to who really created bitcoin), it was meant to enable electronic cash payments directly between individuals without having to use banks.

However, the ASX isn't the only financial institution delving into and testing this new technology. UBS, a Swiss financial services company that provides wealth management and investment banking to private and corporate clients worldwide, has also started investigating the use of blockchain technology for banking.

It said: "Instead of making them superfluous, the blockchain may very well make banks better at what they do."

How will bitcoin and blockchain technology affect you or me? Hard to say, but more and more companies are now accepting payment of goods and services in bitcoin.

Microsoft began accepting bitcoin as a payment option in 2014, but a recent report says it no longer does so. Some other big names are KFC (Canada), Subway, Expedia.com and Webjet, an online travel agency, and there are hundreds of small companies and individuals around the world.

While some people may also see virtual currencies as a way of accepting payment secretly, thereby avoiding taxes, bitcoin is no different to the likes of Bartercard (which provides a medium for members to barter goods and services).

It remains the responsibility of everyone to declare income from any source whatsoever and to pay tax on that income.

While most businesses are honest, there will always be exceptions to the rule — after all, most of us have had a tradesman offer to do a job and take off the GST if we pay in cash.
With the price fluctuations experienced by bitcoin, it is hard to imagine it becoming an accepted means of exchange in the near future, but the technology behind could the next worldwide phenomenon — possibly in ways we haven't even imagined.

Steve Baron
Steve Baron

Steve Baron is a Whanganui-based political commentator, author and Founder of Better Democracy NZ. He holds degrees on economics and political science.