Is Bitcoin a Bubble?
Bitcoin is still by far the most popular cryptocurrency in the world. It’s also the largest by market value, which continues to attract a lot of attention. Not all this attention is positive though. One question that continues to come up is that of: Is Bitcoin a bubble?
What makes Bitcoin so popular?
Did you know that there are over 4 000 cryptocurrencies in the world? So what makes Bitcoin so popular, when there are literally thousands of others to choose from? Here is a summary of a few of the reasons:
- Decentralized Blockchain Technology: The anonymity of users is one fact. Another is the fact that there is the transparency of data. Then there are the fast BTC transactions. These are all key fundamentals to its popularity
- Its availability: As it was the first cryptocurrency ever launched, it’s accepted on the majority of trading sites
- Its protocols: Programming such as Bitcoin halving has aided its popularity
Before we answer the question – is Bitcoin a Bubble – what is a bubble?
First up, let’s define what a financial bubble is. Charles Kindleberger explains a financial bubble is best. He refers to it as, “an increase in asset prices that can’t be justified by its fundamentals.” Basically, it’s an economic cycle that you can characterize by an escalation (a rapid one) of market value. This is especially true when it comes to the price of assets.
Think of it this way – a surge in asset prices creates a bubble, one that exuberant market behavior drives. The assets typically trade at prices that far exceed the actual value of the asset. In other words, the price does not align with the asset’s fundamentals.
So what about Bitcoin – is it a bubble?
When it comes to Bitcoin, there is definitely a lot of speculation going on. This was evident by the huge surge in price in 2017 and the subsequent crash in 2018. So, is Bitcoin a bubble? The answer to this question is tricky, as it depends on how you look at it.
This is a difficult one to answer because while it may show some signs of a bubble, it hasn’t fallen through completely. So, we really can’t know for sure.
Bitcoin has been around since 2009, and while there have been some sharp increases in price, it hasn’t reached the heights of some of the other bubbles that have popped up over the years. The reality is that Bitcoin fundamentals increase each year, as a result of the work of thousands of contributors and excellent open-source developers who continually improve the Bitcoin ecosystem.
The reality is that Bitcoin is far from mature. It’s a young asset class that will go through various price bubbles as it starts to mature. When it comes to Bitcoin, it’s important that you resist the FOMO urge and that you be sensible in how you invest.
We always advise that you follow the golden rule. That is, never invest more than you can afford to lose.