I have invested a lot in cryptocurrencies but I'm talking specifically about bitcoin here. Do I think bitcoin is a bubble? Maybe. Its more complicated than a simple yes
What is a bubble, how do you know when there is bubble, and when will a bubble pop? These are all very hard questions for economists. But a good sign that there is a bubble is when a large share of market participants are buying based on untenable assumptions
A majority of buyers (70%) are buying because they think the prices will skyrocket making this a "good Investment"
Whats the risk here? Bitcoin prices won't continue rising forever, it will Ahave to stop somewhere and the buyers purchasing it based in the assumption of rapidly rising prices will no longer have any use of it and exit the market
Bitcoin is failing as a currency but not as an investment. For now at least.
Nakamotos's intention was to have a peer to peer electronic cash that didn't require the supervision of banks. But it has become an investment vehicle, embraced by many as an asset especially the players in wall street. The vision is failing
Last year belonged to bitcoin, it had risen from $700 to $19000 in just a year. Tech crunch's John Briggs believes that this new surge was entirely due to the investment community
In December 10th, CBOE Global markets began offering investors the chance to bet on the future health of bitcoin. I'm no economist but I read 'The Big Short: Inside the Doomsday Machine" which is a brilliant book by Lewis Michael. It's abut the build up of the US housing bubble during the 2000s and the few individuals who predicted it. The CBOE Global markets sound shockingly similar to the credit default swap market that sought to bet against the collateralize debt obligation (CDO) bubble. Simply meant that in the booming housing market, a few individuals, insured themselves in case the market crashed, which it did, big time.
This surge in interest from the investment world is helping elbow out any hope that bitcoin will mature into a method of exchange.
Currencies need to remain stable. There will be little change in value but not bitcoin level change, thats why foreign exchange trading is a thing. Its important that what you buy today with a dollar you can do it again a week later
"Bitcoin is unsuitable as a currency, because people are far more likely to hold it in anticipation of it appreciating in price" -- Kain Warwick
Bitcoin has become an asset rather than a currency. Instead of a substitute currency, its a speculative asset, a get rich quick scheme. Stable values are required to encourage both commerce and investment
But, what is everyone used it instead of dollars??
In this scenario we look into the full possibility of bitcon being used entirely as a curency and not an investment
Immediately the market cap would increase to roughly 13.8 trillion dollars meaning a single bitcoin would be $800,000. In this environment where bitcoin continued to increase, credit would be impossible. If you borrow a loan of 10BTC to buy a house ($180,000) now, it would be impossible to repay back next year because it would be worth more than $million. They would be no lending or borrowing. Nobody would embrace such a currency. All of this means that for it to continue rising - it must fail at the other goal: to become an alternative currency
It gets worse
What fundamental value does bitcoin hold?
A peice of art needs only to be displayed and its value increases. Bitcoin's fundamental value is based on its usefulness as a currency, a medium of exchange
The market is filled by people who hope that bitcoin is going to grow rapidly and make them rich and those that think it will be a widely used currency. Eventually one of these groups will have to leave the market. Not good for bitcoin either way. We thought that if it remains an asset for only investors it would rise. That is still true, bitcoin will continue to rise even if it doesn't have its fundamental value but when it stops rising what will happen? And if its fundamental value is embraced the prices will also rise higher and become unbearable for people to use because of the high prices as being witnessed currently. Certain transactions have high fees as much as $11 meaning it won't be suitable to buy coffee. Eventually in both scenarios would lead its long awaited bubble to burst.
Which part of the market are you? Do I think the bubble will burst soon. No. May be it will never burst and the prices will continue rising forever which is unlikely. It is unpredictable but if the rate of increase continues to be this high it might be sooner than we thought
I believe the crypto revolution is very real. Its the future but with this society bitcoin will struggle. It can either become the biggest success story or be an icarius who flew to close to the sun in its attempt to become one
Upcoming articles
Will bitcoin's scarcity ensure its value to always be high?
The fate of other cryptocurrencies if bitcoin fails
