Do you really believe that Bitcoin is a bubble which is about to burst? Well the biggest story of 2017 was the exponential surge of Bitcoin prices and if its current trajectory continues, in no time we would hear a much bigger story of Bitcoin bubble burst.
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Yes! Bitcoin is a bubble because just like any other bubble that we might have noticed i.e. dotcom bubble or housing bubble, Bitcoin has no inherent value and the investors are willing to pay the price which is far more than its intrinsic value. Moreover the price is determined solely by the balance between buying and selling.
One might argue that Gold is also a bubble because it has no inherent value and Gold prices are also booming on speculation just like Bitcoin. I mean, you may argue that gold is a bubble, but you cannot dispute that it has no inherent use and unlike a business or a piece of land, it is not a productive asset. If people stopped buying gold, its value would collapse. If its value started collapsing, more and more people would try to sell it, and be willing to accept lower and lower prices. That’s just the basics of price determination in a free market.
Now the bigger question is that if bitcoin doesn’t possess intrinsic value what is the USP and why the prices of bitcoin are appreciated every fraction of second.
Bitcoin is built on block chain technology – a digital ledger of transactions – which enables the currency to be traded independently from any central banking system, without risk of fake or duplicate. That’s the USP of Bitcoins and the only reason of being successfully traded in the market. The implementation of bitcoin, the revolutionary block chain technology, the thrilling tale of a mystery creator whom no one knows (and who may never have existed), all that is great stuff and fits right into today’s world. Even so, the price of bitcoin is a different matter. The rise of bitcoin’s price is a perfect demonstration of how price gets determined in an open market, just as its collapse will be. The erotic price spurge clearly indicates that more and more people are willing to buy it, compared sellers who are practically negligible in the world today. The pace at which bitcoin “miners” can create new units automatically declines over time, with the maximum possible number of bitcoins fixed at 21 million. So the supply of bitcoin is also constrained by the mining process. A lot of people have taken to heart the fact that there is an inherent limit to the number of bitcoin that can be created.
What is more surprising is the fact remains that the persistent price rise of Bitcoins is untapped in the financial markets or wall streets. For example, there is no real way of shorting bitcoin today. The derivatives available as of now are on unregulated markets and not trustable. The bigger the bubble grows there are more chances of investors losing money because of government or regulator intervention.This could change soon as a number of trustworthy exchanges are working to create bitcoin derivatives, Nasdaq being just one of them. This could well be a dramatically turning point in this bubble.
Anyhow, the bottomline for the individual saver and investor is that this is gambling territory. That’s not just because of the bubble, but also the mechanics of bitcoin. Even if you understand and appreciate that it’s a gamble and want to try it, the mechanics are a problem. All sorts of charlatans have popped up over the last few months. There are apps and websites where you can ‘buy’ bitcoin but they also claim to store it for you. Many of these offer no provenance of any underlying transaction or ownership.
At some point it must burst. Today the combined value of all the 16.7 million bitcoins in existence is US$160 billion, with the total capitalization of the cryptocurrency universe some US$287 billion. Tomorrow it could be zero.