Bitcoin has just crashed again and we may see another rally. But is this the time to buy?

Those who got in on the ground floor years ago have made a killing.

Those who got in last year after the crash and exited shortly after Elon Musk took the plunge in February have joined the ranks of the uber-rich.

And for all the criticism about its volatility, instability and environmental irresponsibility, we probably haven't seen the last Bitcoin rally.

But before we get around to considering that question, let's just back-track a little.

Tulip Mania:

Well, maybe just a little more than a little. Let's go all the way back to 1637 to Holland, then one of the most powerful nations in Europe.

That was the year that tulip mania finally ran out of puff, the year when one of the most insane investment bubbles of all time burst spectacularly. And yes, we're talking about tulips, the flowers.

Originally from Turkey, they became highly fashionable in the early part of the 1600s, sought after by the well-to-do and, ultimately, a symbol of wealth and power deemed an absolute necessity for anyone with social pretensions or ambitions.

By 1634, demand for tulip bulbs – which not only were rare but fragile – was such that the trade crowded out most other Dutch industries.

At its peak, a single tulip bulb cost six times the average income, with some going for as much as $1 million in today's money.

They were traded on stock exchanges in Amsterdam, Rotterdam and other Dutch cities.

BUT one day somebody in Holland woke up and thought ... "You've got to be friggin kidding, no Tulip bulb is worth a million bucks, this is hype - time to get out of bulbs fast".

And so it was; after three fabulous years, the 'Bulb-rush' came to a crashing, financially crippling end.

A large swathe of the population had borrowed to buy bulbs, certain that prices would only ever go higher, and when the market turned, it did so with a vengeance as investors were forced to dump their, bulbs at a massive loss.

If this sounds too ridiculous to be true, you're right. But it really did happen.

So, what do tulips have to do with Bitcoin?

A lot, as it turns out.

Economics is really a study of human behaviour at both an individual and a group level and there are a couple of fundamental laws, or assumptions, used as the bedrock.

One is that individuals always act rationally. The other is that everyone always acts in their own best interest.

That explains why economists have such a dismal track record in forecasting anything.

Not sure about you, but your correspondent's behaviour occasionally has veered towards the irrational and certainly not in anyone's best interest. Multiply that several billion times and you have a recipe for unconstrained lunacy.

It's why we have booms and busts, prosperity and poverty, wars and famine, why we lurch from one extreme to the other. You can't just assume it all away and pretend it's not there.

Which brings us to Bitcoin and the mysterious world of cryptocurrencies.

Bitcoin is just one of more than 4,000 cryptocurrencies. The unifying feature of almost all of them is that they employ what's known as blockchain technology – a record-keeping or ledger system – to conduct transactions.

While it is a complex system, it relies on a simple idea: to ensure stored data is public and cannot be manipulated or controlled by any party, state or individual.

Blockchain technology has huge potential for almost every facet of a data-dependent world, from conducting elections to healthcare to financial services. The Australian Securities Exchange uses it for its transactions.

While Bitcoin was among the first to use the technology, it doesn't own it.

That's something many Bitcoin investors don't get. They're quick to extol the virtues of blockchain but don't understand that Bitcoin is just one of many thousands of organisations that employ it.

Not only that, there are as many different variations and applications of the technology as there are users.

The technology can be customised, depending on how you want to use it. And Bitcoin's blockchain has quite a few deficiencies.

The original … but not the best?

When it was launched in 2009, Bitcoin devotees declared the decentralised ledger system would render the global financial system obsolete. Central banks would have no place in the world and Bitcoin would replace national or fiat currencies.

That hasn't happened. Ironically, more than a decade down the track, Bitcoin remains priced in US dollars, the world's reserve currency, and investors continue to measure their wealth in good old dollars and cents.

In an even greater insult, central banks, including the Reserve Bank of Australia, are actively pursuing their own forms of digital currencies.

And while Bitcoin remains the poster child, and by far the biggest cryptocurrency, it has spawned legions of imitators, some of which hold far more promise than the original.

Elon Musk, the Tesla car founder who splurged $US1.5 billion ($1.9 billion) on Bitcoin in February, now concedes the currency uses far too much electricity.

It's an environmental disaster in the making so he's now plugging Dogecoin, the joke currency based upon a dog.

What few investors will admit, however, is that Bitcoin is slow and hugely expensive to use. That's not just compared to other digital currencies. It's way more expensive than conventional transaction methods.

Among its rivals, Ethereum, the second-biggest network, is often touted as the system that eventually will dominate. But its transaction fees are horrendous as well.

It operates a little like Uber, with surge pricing.

Last weekend, for instance, if you'd gone out to lunch on Saturday and spent $120 and then tried to pay with Ether, you would have been hit with a $385 transaction fee.

But who needs to use these systems when you can create your own blockchain and cryptocurrency?

Binance, a major exchange, runs off the Ethereum network and offers others the chance to piggyback its system.

That has attracted some unusual traffic.

Blockchain transactions may be public but the identity of those behind them can be obscured. That's why authorities have been concerned about nefarious activity such as drug trafficking, money laundering and terrorism financing.

Among the many new currencies is one to facilitate online pornography subscriptions, the aptly titled Cumrocket. And like most fields of human endeavour, there's no escaping toilet humour.

PooCoin launched last month along with a stern warning from UK authorities about the potential risks of investing in it. Or stepping in it.

One of the few operations that seems to have a real business model, along with executives, employees and actual offices, is XRP, the currency launched by Ripple Labs.

It is aiming to compete or replace the SWIFT international payments transfer system used by most banks. It is quick and cheap.

Perhaps because of that visibility, it has become the subject of a lawsuit by America's Security and Exchange Commission, which has charged it and two executives with selling $US1.3 billion in unregistered securities.

Interestingly, SWIFT is fighting back. It is attempting to compete with Ripple's blockchain technology with a rival technology, Global Payments Innovation.

Story By | Ian Verrender