The Bitcoin Bubble

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As Bitcoin has risen from obscurity, its sheer momentum has forced both the financial world and mainstream media to stand up and take note. During 2017 alone the price of Bitcoin (BTC) has seen gains of more than 1700%. It’s that kind of rise that has critics calling the Bitcoin bubble the greatest they have ever seen. However, there are just as many supporters of the world’s first cryptocurrency, suggest that such lofty heights are a long way short of what its potential truly represents.

To call it a Bitcoin bubble in and of itself is difficult. A bubble is often defined as an asset that is trading well in excess of its intrinsic value. The issue with an asset like Bitcoin or cryptocurrencies, in general, is that they technically have no intrinsic value.

Supporters argue that fiat currencies also have no intrinsic value. However, by law, taxes in the United States need to be paid in US Dollars. This gives the US currency a true level of demand and therefore a true value. While Bitcoin itself, at this point in time, has only limited application as a form of payment. As such critics argue that it’s simply Bitcoin speculation that is driving the massive gains, which puts it into bubble territory.

The Bitcoin bubble is the New Gold Rush

Fundamental gold investors have traditionally used the precious metal as a hedge against inflation to protect themselves from economic turmoil. And there are some similarities with Bitcoin in that there is effectively a limited supply.

However gold speculators also, buy gold because they believe the price will simply move higher over time. Interestingly the search term, ‘Buy Bitcoin’ has now overtaken ‘Buy Gold’ in Google searches, pointing to heightened enthusiasm for Bitcoin speculation and the belief that it will simply keep moving higher.

Famed economists Olivier Blanchard and Mark Watson suggest that these types of bubbles occur because speculators believe that prices will simply continue to move higher over time.

And this is where a Bitcoin bubble, becomes more apparent. As retail investors, continue to enter the market, many are simply riding the momentum of what are already exponential returns. And many simply expect that they will be able to sell at a higher price, sometime in the future. Which may or may not be the case as it is effectively Bitcoin speculation.

Comparison Between Bitcoin Bubble and Dot-Coin Boom

The NASDAQ composite, the benchmark for technology stocks in the US saw a threefold increase in a few short years. However when it eventually crashed it took 15 years to regain its former lofty highs. But what we did see was a raft of new businesses that changed the world. Names such as Google, Amazon, and eBay were all startups as the tech boom was in full flight, but have gone on to shape our modern and business culture.

To put the Bitcoin bubble in context, US tech stocks had a value of nearly 1.7 trillion dollars prior to their collapse. As it stands cryptocurrencies are currently around 170 billion dollars meaning there is still potentially more room for the cryptocurrency market to grow.

Is the Bitcoin Bubble Actually a Blockchain Bubble?

However it might just be the technology upon which they are built, known as blockchain, that is contributing to the lofty valuations. The blockchain is a digitized ledger system that tracks transactions. We are seeing potential applications for blockchain technology in the banking sector, the insurance industry, gambling and forecasting amongst many others.

Many pundits are simply betting on the blockchain technology by investing in Bitcoin. They see the long-term future that the technology represents which is contributing to the current Bitcoin bubble status.

During the dot-com boom, small penny stock companies tacked on ‘dot-com’ to their company name and saw huge gains in the value of their stocks. We are now seeing similar tactics with Blockchain. Recently a company called ‘Long Island Iced Tea’ added blockchain to its name and saw a 500% gain in its share price.

Price Discovery and the Bitcoin Bubble

So is There a Bitcoin Bubble?

If you think the Bitcoin bubble is just like the penny stocks during the dot-com boom or another gold bug pumping up the precious metal, hoping there is a buyer at a higher price waiting in the wings, then you might believe the Bitcoin bubble is the greatest you’ve ever seen.

While the technology advances in the form of blockchain might warrant the current prices, the issue is that Bitcoin itself might not actually be the be the ultimate winner of the cryptocurrency race. Ethereum and even Cardano offer quite a bit more in the way of versatility and application. Bitcoin was built on a foundation of security and is difficult and costly to buy and trade or even use.

A smarter strategy might be to buy a portfolio of leading cryptocurrencies based on their market cap and wait to see which one ultimately gains the most mainstream appeal and functionality. To quote Warren Buffett, “diversification is protection against ignorance.”

Ultimately whether there is or isn’t a Bitcoin bubble is really a matter of opinion, but what is for sure is that it will be the market that makes the final decision.