Bitcoin – the virtual gold of the internet, took over the digital world as soon as it was launched. Bitcoin gave a whole new meaning to fast cash and digital transactions.
Satoshi Nakamoto wanted to create a digital cash gateway that can be transferred from one person to another without being a central entity involved. A revolutionary development in the field of cryptocurrencies.
So, what does this mean for investors? Is it here to stay? Can I make money? Will I lose money if I invest?
Let’s dive into the common question of whether or not Bitcoin is a bubble.
The word bubble or famous sentence “It’s a bubble that is soon going to burst soon,” was not so familiar before the internet era. It’s a term used when something gets so famous suddenly that it seems isolated from reality or looks like it won’t last for long due to its sudden burst.
When you invest, the value of the product you invest in could change on certain factors like lack of supply, the interest of investors and how the past changes in the value of the product could impact or change its future value.
If these future values are predicted to extend beyond rationality, some investors predict the outcomes as being a bubble that might burst in the future, thus resulting in a sudden decrease in its value.
When Amazon was launched, and the sales were skyrocketed, the corporate sector was hesitant to invest thinking it’s a bubble that’s going to burst, but as the time went on Amazon got stable, and today it is a multimillion-dollar business.
When bitcoin launched, and its value reached its peak, many started declaring it as a bubble that is going to burst soon. Well, up-till now we can say this statement falls in both right and wrong section.
Bitcoins value and its nature surely has some properties where it seems evident that it won’t last for long and will end up bursting. Although many people and big corporate sectors have invested and are still investing in it, the discussion of Bitcoin being a bubble is still a hot topic in the cryptocurrency world.
As early as 2014 Nobel laureate Robert J. Shiller said that bitcoin “exhibited many of the characteristics of a speculative bubble.” Shiller even declared that bitcoin was the best current example of a speculative bubble. Economist John Quiggin in 2013 said, “bitcoins are the most demonstrably valueless financial asset ever created.”
When people invest in some physically existing business, it has some physical backing that lessens the risk factor attached to it. When it comes to bitcoins, it is a digital currency that exists just online in digital form.
Its value is because people believe that it has value; value that is created by the people using, exchanging, or mining it. Thus investing in cryptocurrency is tricky and risky business.
The sudden rise and fall nature of bitcoin are what makes it risky and exciting for investors, as investing one day, you might become a millionaire within a week or end up losing millions within a few days. Investing in bitcoins requires smart decisions and proper understanding of how cryptocurrencies work in real life.
Before jumping into a discussion of bitcoin being a bubble or not, lets first discuss the properties that define some assets as a financial bubble.
When a business or asset is launched into the market, its value is low until interest grows from the market and investors. It remains flat on the graph for quite some time. The asset lacks attention and is unable to showcase itself on the stock market through its value or some noteworthy event.
After some time at a particular time on the graph, the assets start getting attention, and its price or value rises.
This happens with so much speed and intensity, it behaves like a snowball effect, some investors start investing in it, the value increases rapidly, and all of a sudden a vast number of people start investing to gain some quick profits.
The value might increase without any apparent reason.
The more the investments, more is the value that comes with a risk factor of value might burst, i.e., the bubble is about to bust.
The last stage is broken downstage, as the price rose without any apparent reason, there are chances that it will fall eventually, and the bubble will burst.
This is the panic stage in the financial market as investors feel the risk attached to their investments and start to sell their assets. They try to limit the amount of loss in the future if they continue to hold on to their investments.
This becomes a never-ending cycle that may continue until the bubble is completely burst.
Now that we know what a bubble in the financial market is let’s associate these properties with the Bitcoin.
When we observe the graph of Bitcoin over mid 2016 through mid 2019, it shows features of a Bubble, a slow start (1), almost no peak at the beginning (2), then going to peak (3) and then reaching a new low again (4).
It never went to zero. If you look at the entire history of Bitcoin it kept on going up after it reached a new low for that cycle.
Supporters of disapproving Bitcoin as a bubble use this argument that the value of bitcoin never hit zero, i.e., it went to its low, but it never crashed completely.
It also showed stability at certain times in the graph.
There are many discussions on both ends, i.e., bitcoin being a bubble and being not.
Let’s discuss both points of views.
Supporters of considering Bitcoin as a bubble has few strong arguments supporting their statement. As discussed earlier Bitcoin is a decentralized network, which has its pros and cons, which means that some country or organization does not own it.
Thus it has issues of security and uncontrolled value.
Fiat currencies are controlled, and it has central banks and governments at its back. Making its stable form of payment as compared to bitcoin.
Fiat currencies could also be used for “official” uses and to pay taxes. Whereas bitcoin having decentralized nature, many governments are hesitant to accept it as the payment method in official and government organizations.
It is even banned or is under a lot of restrictions in many countries. The leading claim governments make on banning bitcoin, and other cryptocurrencies are that it has no single owner behind it.
They are right to some extent, as it might take a lot of time to regulate cryptocurrencies properly and its changing and unstable nature are one of the significant hurdles in this.
Another argument by supporters of this point of view is that the people claim that Bitcoin is overhyped, i.e., its value needs to be less than it is.
At the start and even now people purchase or invest in it for different purposes, some to invest for the long term, and a massive number of people purchase to sell it quickly and make quick profits.
They are thus making it unstable.
People who wanted to get rich quick cared less for the system in the long term. So the price kept on inflating, and it resulted in even more people investing just because they wanted to get rich quick.
This became one of the reasons for its instability and sanctions by the government. This also became the reason of its crash in price.
Government sanctions and restriction also resulted in one of the leading causes of its crashing in value.
Also, Bitcoin is now considered the old and somewhat outdated system. New and advanced cryptocurrencies, like Ethereum, IOTA, and Litecoin, claim to be an improved form of Bitcoins.
Litecoin is four times faster than Bitcoin; IOTA is also considered superior then Bitcoin. Ethereum is so advanced that it is now used to build and create cryptocurrencies from it.
Bitcoin is the core product of cryptocurrency, but now that we have such advanced, well managed and fast form of cryptocurrencies.
Sooner or later, people will start realizing the drawbacks of bitcoin, and they might completely shift into some new kind of cryptocurrency.
This would result in the crash of the value of Bitcoin.
Like people say yes to question, “Is Bitcoin a Bubble”? Some people say no to this question. Let’s discuss their main arguments.
The price of bitcoin fluctuates a lot. This does not mean that it’s not stable; it has its value, the value which is decided by people, and not the government and centralized jurisdiction.
People who participate end up being the reason for the value, and they believe this to be the solution of bitcoin not being a bubble.
Some investors don’t invest in Bitcoin thinking it’s volatile at the same time this property also attracts investors as they see the opportunity of a good investment.
Investors put money just because of its unpredictable nature as they hope that their price will skyrocket as it did a few years back. This is a strong argument as we can conclude from this that bitcoin is something that is not going to crash if people keep on investing even for this single reason only.
Cryptocurrency is something that is known to come back from ashes, although it has seen many “bubble bursts,” but it is still in the game and has not entirely crashed.
As the number of people buying the bitcoins increases the value of bitcoin also increases, at the same time, it also decreases as people are selling it – the volatility of bitcoins!
Let’s observe the value of Bitcoins based on basic economics, scarcity, utility, supply, and demand.
Like gold, bitcoin is scarce, and it is going to end one day. The limited nature of anything makes it valuable, so does bitcoins.
Transactions are safe and traceable. The system is uniform and similar, and you can participate in it.
Other significant factors that determine the value of bitcoins include;
Competition: With new and advanced cryptocurrencies coming into the market, completion is one of the factors affecting the value of bitcoins. Bitcoin had already created a market for new entrants, and they don’t face such a hard time entering into the market. Also, with technology advancements and taking feedback from users the new systems like Dogecoin, Peercoin, and Etherum, the competition will get even tough for bitcoin. This competition is also good for bitcoin as it keeps the market trends active.
Trading: Like trading on traditional exchanges takes place on NYSE and FTSE. Cryptocurrencies are traded over Coinbase GDAX and other exchanges. You can trade over these exchanges. The more popular an exchange is easier is to draw out new investors. They are thus creating a network effect.
Regulations: The governments did not accept the sudden peak in the popularity of Bitcoin; Thus declaring it as a digital asset became a topic of discussion for stakeholders. In the US, the Security and Exchange Commission (SEC), classify cryptocurrencies as security, whereas the US Commodity Futures Trading Commission considers it to be a commodity. These type of confusion effect overall value of bitcoin. Some countries have even banned it altogether.
The factors of volatile nature and halving events are lucrative for smart investors as they assume that these factors will result in increasing the value in coming years rather than decreasing.
Only time will tell the future value of these currencies. In short, if a marketer is smart and knows how much and when to invest, the risk factor is quite lowered, and good profits could be made!
There are a lot of cryptocurrencies nowadays, and choosing one that is safe and suits your investment requires proper research. Before investing, you must check the origin of the currency, where it is being traded.
Are they being traded on safe exchanges? Did they pass through the screening process of getting approval from authorized or recognizable bodies?
Are investments being made as ICO’s or STO’s? Your hard-earned money deserves this kind of safety checks to be on the safer side.
STO’s provide regulation and much needed extra security for your crypto investments. If you don’t understand the benefits of STO’s; We created and article that goes deep into What Are STO’s.
Fiat money that is commonly used in the physical world, hand to hand transactions, is owned and governed by the governments.
From printing to the distribution of wealth among the citizens, the cash flow is controlled and governed by a central organization that is usually the central bank or the government.
Satoshi Nakamoto wanted to create a decentralized system, and a single entity does not govern that.
This system works on a digital chain, called the blockchain. Participants of the system mine using high-end computer systems and rewarded with bitcoins in return for the computation performed at their end.
He wanted to create a system where anyone around the world could participate and take part in the mining process and gain rewards that has a lot of value in the online digital world.
This kind of need for a decentralized system was one of the main motives to create bitcoin as an online digital transaction currency.
That is fast, safe, and secure. In short Satoshi’s primary motivation to launch bitcoin was to build a system that everyone can trust and that relies on the involvement of people participating in the system rather than some central entity.
As we have discussed for and against arguments of Bitcoin being a bubble or not. Let us draw some conclusion.
Bitcoin is a revolutionary invention of the 21st century; it has opened new ways of online and digital transactions. From a slow start to reaching a value so high that people declared it as a bubble, bitcoin has seen all.
When it crashed, the people who were calling it a bubble rushed to claim their points. When the value increased within days, the people against calling it a bubble came forward and repeated their claims.
Although we might not be able to draw out a complete conclusion, one fact is for sure that if bitcoin is a bubble, it hasn’t burst yet. Slowly its value is increasing.
When asked, “When will bitcoin burst,” no one could come up with a solid answer. In some situations, it seems like it is, in fact, a bubble and is going to burst soon, but being a cryptocurrency it is its very fundamental nature to be volatile, and it keeps on coming from zero to hundred.
So the question is bitcoin a bubble? Well, we will have to wait to get an answer to that as future will tell everything.