Bitcoin Bubble: Predicting The Inevitable?
Let’s get some background around the Bitcoin Bubble. November 29th, 2017 marked yet another impressive feat by the world’s favorite cryptocurrency – Bitcoin. If you are wondering what that achievement was, Bitcoin clocked a price of $10K per coin. Even though market research specialists had foreseen such an event, what they didn’t anticipate was that this event would occur in such a short period of time. Then again, Bitcoin’s rise to fame didn’t happen in the blink of an eye. Being introduced in 2009 by anonymous developer Satoshi Nakamoto, Bitcoin’s growth was gradual till 2014, after which the market shares continued to increase at a staggering rate. (Learn what factors influenced Bitcoin’s meteoric rise: BITCOIN PRICE: THE PAST, PRESENT, AND THE FUTURE!)
The most baffling fact of all is that Bitcoin doesn’t have any physical form. It is a completely decentralized digital money that is tightly held together by its blockchain software (BLOCKCHAIN TECHNOLOGY EXPLAINED: THE BACKBONE TO CRYPTOCURRENCY). Another reason to be surprised is that its value isn’t tied to any physical commodity. The value of Bitcoin is purely based on demand and supply. The fact that it reached the $10k mark without having any centralized system governing over it gives rise to skepticism about this e-currency.
This very doubt surrounding Bitcoin’s progress has led market researchers to believe in an event that could possibly happen in the near future, dubbed – The Bitcoin Bubble. If you have researched about Bitcoin and scoured through its drawbacks, you must have surely heard of the Bitcoin Bubble. What it basically means is the downfall of Bitcoin. If it were to happen, you could safely assume that the fall from such a gargantuan height will hurt, and the pain will be directly relayed over to the Bitcoin investors. The Bitcoin bubble could be the next depression.
So let’s delve deeper into the specifics of “Bitcoin Bubble” and know how what can cause it, and the golden question that prevents you from investing in Bitcoin – will the event happen anytime soon?
First off, let’s understand what a bubble represents, in economics. When you think of a bubble, you picture a sphere that floats around in air or water. Think its life cycle, a bubble starts small and expands as it fills with air. You would like to think it can grow forever, but ultimately, unable to handle the air inside, it bursts. This is the exact same idea behind a financial bubble, where a commodity gains huge price gains followed by a contraction where its value plummets exponentially.
When History Points To The Future!
You may wonder why Bitcoin would share such a fate. Well, the reason is, it currently portrays all the right symptoms. This “bubble” phenomenon is not a term invented for Bitcoin. If you read through history, the first ever recorded bubble took place somewhere around 1634 – 1637. It was called the Tulip Bubble or Tulip Mania. Yes, it was because of the flower- Tulips!
It happened in Holland in the 16th century. When tulips were first introduced in Holland, everyone wanted to own these beautiful flowers. The Royal family quickly adopted them as Luxury goods, and this factor caused the price to shoot up the roof. The prices peaked so high that small-time traders could not buy even one bulb of Tulip. Suddenly, due to insanely high prices, the lower market disappeared in the month of February 1637, and the demand went down. We are not talking about a gradual decline in demand; the numbers were so staggering that the value of tulips went down to a 10th of its former value. The investors went bankrupt. Consequently, the debt began to rise. The waves of such a recession shook the country for the following ten years!
The most recent bubble took place in 2007. It brought about a painful recession in the United States. The event disrupted the economic balance of America. This event was called “The subprime meltdown”.
In 2002, it was very easy to buy a house in America owing to the relaxed estate tax set by the United States government. Real estate values were shooting up at the time and everybody wanted in on it. Banks knew that the real estate prices were skyrocketing and they started lending huge amounts of money to even people with bad credit. The bank’s logic was that even if they couldn’t repay the loan back, the bank could always seize the property, and it would have increased in value considerably compared to when it was bought.
Unexpectedly, in 2007, the adjustable mortgage rate rose. People didn’t want to invest in real estate anymore. The value of real estate crashed, and the high mortgage caused many people to default. Banks could not get all the money back by selling the borrower’s assets because it valued much less compared to when it was bought. In conclusion, the bubble burst in 2009 and many banks went under burying themselves in negative equity.
Bitcoin: A Future Studded With Concerns
When studying Bitcoin’s price trend, you can see a pattern similar to the Tulip Bubble. From 2014, the value of Bitcoin is shooting up at an unprecedented rate. Bitcoin is not a tangible asset like the Dollar or any other currency.
The case of volatility was made even worse when many major financial experts in the world made remarks that the Bitcoin Bubble may burst much sooner than anyone anticipated. The latest comment was by J.P. Morgan’s CEO Jamie Dimon, where he went out and called Bitcoin “a Fraud” and made the remark “worse than tulip bulbs.”
One could say that he said this to add value to his own firm, but there are other financial experts who share his views.
Image Source: https://www.bloomberg.com/features/bitcoin-bulls-bears/
The real drawback associated with Bitcoin is that it’s all belief with no physical proof to show for it. We don’t hold anything tangible, it’s all digital. There is no collateral in case the price drops, no notes to exchange at the bank. This marks the possible downfall of Bitcoin
There are other factors that add relevance to the burst of Bitcoin bubble, like hacks- most notably the Mt. Gox hack, and Governments. Yes! It is a fact that the government can disrupt Bitcoin shares. The recent announcement by China stated that it is stopping all aids provided to Bitcoin, and the country placed a ban on Bitcoin transactions.
In reality, nobody knows how much a single Bitcoin is worth because it varies greatly with demand and as is pretty much non-dependent on any other factor. If the Bitcoin bubble bursts, there certainly will be a loss of billions in shares, and the investors will be the ones who will have to bear the burden.
Can we expect it in the near future? Well, no one really knows about that except the fact that Bitcoin is gaining in popularity and shares by the minute. If you have invested in Bitcoin, the only real advice is to stick to the news and market variations. If you feel that the odds are turning against you, have a plan B ready!