In the history of the world economy, nothing comes close to the changes in Bitcoin’s price and fortunes.
In the span of just a few years, Bitcoin gained official recognition in some countries, while being banned in others. Its price increased by a dazzling amount, before falling just as spectacularly. Respected voices in the financial world have called it the future of money, while other equally reputable individuals have called it a fraud and a delusion.
Before we proceed to explore what is driving the Bitcoin phenomenon, we assume that you are already familiar with the fundamentals of Bitcoin. If you’re not, you can read this article that explains cryptocurrencies like Bitcoin and Ethereum in layperson terms.
The “Bitcoin Bubble”
From a price of just a few dollars to a peak value of more than USD $20,000 just last year, Bitcoin has been through a wild rollercoaster – and
Bitcoin’s value surged more than 1,000% in 2017, accelerated by increasing interest from investors who believe in the futures of digital currencies as well as those driven by the FOMO (Fear Of Missing Out).
Since there seem to be experts that have contrasting views of Bitcoin, let’s objectively assess the characteristics of a bubble in economic terms, and see whether Bitcoin has the properties of a classic bubble.
According to Investopedia, a bubble is “A bubble is an economic characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.”
What this means is: when there is overwhelming demand for an asset from investors, the price is driven up beyond any rational reflection of its actual value, making the sustaining of that artificially high price unsustainable. Former Federal Reserve Chairman, Alan Greenspan, described that formation of a bubble due to “irrational exuberance”.
To some, Bitcoin seems indeed fit the definition of a bubble.
Analysts from Goldman Sachs warned: “Not only is there no ease of execution, but settlement often takes as many as 10 days. In late 2017, the price discrepancies among 17 US exchanges for one bitcoin amounted to $4,156, or about a 31 percent difference between the high and low prices. Transaction costs have skyrocketed and frequent icing has wiped out entire wallets of their bitcoin holdings.”
Even the esteemed investor Warren Buffet said of Bitcoin: “I can say almost with certainty that they will come to a bad ending. When it happens or how or anything else, I don’t know.”
However, this is only true if the value of Bitcoin is inflated way beyond its realistic value. For those who believe that its true value is not even reached yet, Bitcoin’s rise in value is only natural, and any blips are due to emotional sell-offs and represent a “sale” for the true believers.
Ironically, the fact that the true value of something can usually only be ascertained on hindsight mean that today, no one really knows if Bitcoin is a bubble – your guess is as good as mine, or Warren Buffet’s.
Should You (Still) Invest In Bitcoin?
Bitcoin has proven to be a highly speculative investment that fluctuates wildly.
Ironically, being a more “established” or “mainstream” isn’t exactly a good thing for cryptocurrencies. Despite its success, there are glaring issues with the current Bitcoin protocol, which has it struggling to cope with the scale of transactions each day.
As the weaknesses and flaws of Bitcoin are revealed through its widespread use, new and better forms of cryptocurrencies that number in the thousands are emerging, each with their own unique features.
Of course, there are other ways to get exposure to Bitcoin, such as trading Bitcoin through a Contracts For Difference (CFD) provider like IG. The benefit of this approach is that you do not have to go through the hassle (and risk) of keeping a digital wallet with bits of Bitcoin in them. If you believe the price of Bitcoin will fall, you can even “go short” and profit from price drops.
As a rapidly evolving asset, Bitcoin presents exciting opportunities for individuals and countries. As with all investments, and especially for Bitcoin, don’t be carried away with the potential for gains that you ignore the immense risks. Invest only what you are willing to lose and always apply sound investment fundamentals to manage your risks.
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