Is Bitcoin Really a Bubble Waiting to Burst?
It wasn’t long ago when you needed to have thousands of bitcoins to buy a couple of delicious pizzas. Now, compare that to December 15, 2017, when a single bitcoin was being traded for over $19,300.
This frenzy and unprecedented appreciation of the currency has led many analysts to call it speculative and a bubble about to burst. Fed Chairman, Janet Yellen called bitcoin a “highly speculative asset”; Vanguard founder Jack Bogle advised investors to “avoid bitcoin like plague, while JP Morgan’s CEO dubbed it as fraud.
The people who call bitcoin a scam or bubble, compare it to what Dutch speculators did to tulip bulbs in the 17th century. Dutch enthusiasm for the tulips arbitrarily inflated the price to an insane level, encouraging ordinary people to invest even if they had to use their property as collateral. When the prices crashed, a large number of people lost everything they had.
A more recent example of that is of the dot-com bubble of the 90s when VCs of Silicon Valley and NYC bankers claimed to be setting the foundation of a whole new economy. What happened afterwards is history.
Their logic is very simple – that bitcoin has no ground value. It has a worth because people trading it think and agree that it has a certain value. It’s not backed by any physical assets such as gold, and brings no interest or dividends as would stock in a company.
Moreover, its scope as a financial instrument is limited as there are certain areas where bitcoin cannot be used as money. Hence, its soaring price is causing alarm bells to ring for many financial advisors.
Reasons experts believe it’s not a bubble
The counter-argument is equally powerful and backed with some solid points!
The first argument is that bitcoin is receiving wider “official” acceptance as many countries officially accepted bitcoin as a legal payment method in 2017.
Take the example of Japan and Philippines where official acceptance (last year) helped people use bitcoin to send and receive instant remittances at a low-cost. Australia and Russia are also aiming to give it a legal status, which will further strengthen the adoption and sustain the currency’s growth.
Additionally, experts argue that the reason why regulation of this sector is on the rise is because a number of regulators and financial institutions are eyeing bitcoin as a potential source of economic growth and innovation. Even the SEC is closely looking to introduce regulatory framework for the market. This is a very different scenario than regulation stifling the industry.
Tertiary, bitcoin’s merchant adoption is also on the rise. Companies like Microsoft are accepting bitcoin as a payment method. Moreover, people in the distressed economies like Venezuela and Zimbabwe are using bitcoins to save their net worth and making purchases in a high-value currency as local ones offer no value.
Last but not the least is the argument behind bitcoin’s soaring price. The currency is so valuable because its demand is increasing but the supply is very limited and fixed. With only 21 million coins available to be mined, the pace of issuing newer ones is dead slow, allowing market players to increase the price with supply/demand factors in sight.
This wider acceptance, active involvement of market players, and support by the state/regulators will ensure this bubble doesn’t burst.
There are arguments for both sides which have valid points, but we here at InWage believe that the ever growing user population, support of beneficial regulations, and the active involvement of the market players will ensure that Bitcoin remains one of the most robust cryptocurrencies out there.