Ever since the early days of Bitcoin, skeptics have always asked - is Bitcoin a bubble? Is it just another inflated and overhyped trend? The concept of the “Bitcoin bubble” has intrigued people for many years - there have been a lot of calls and claims that the “Bitcoin bubble burst” happened on different occasions throughout time - but the cryptocurrency is still alive and well.
In this tutorial, we shall try to uncover the mysteries of the Bitcoin bubble - what it is, why people are talking about it, how it’s characterized and so on. We’ll talk about the “for and against” arguments that are most often brought up when talking about this “bubble”.
After that, we’ll try to answer the ever-longing question - is Bitcoin a bubble? And if it is… When will the Bitcoin bubble burst?
Michele Nati
Director of Research and Innovation Projects at WSense SRL
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Table of Contents
What Does Bubble Mean?
So we have the question - is Bitcoin a bubble? But what does the expression “Bitcoin bubble” actually mean?
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In financial terms, a “bubble” is a state where an asset stays stale for the longest time, then explodes and its price skyrockets through the roof. The “burst” that was referenced happens when this asset’s price drops down as quickly as it rose up.
The fall has to be very specific, however - and by specific I mean permanent. If the asset (in this case, Bitcoin) manages to rise again, then that wasn't a “bubble burst”.
How do you tell if it’s a burst or a false alarm while the drop is happening, though? Well, that’s the tricky part - you can’t tell all that easily.
If you’re a Bitcoin expert that has been following the coin ever since its inception, you might be able to tell a thing or two about its future. However, when it comes to cryptocurrencies, they have one very important trait - they are absolutely unpredictable and extremely volatile.
You might have followed Bitcoin day-by-day from the minute that it was released and still be completely out of line with your predictions. There are so many unpredictable things that can happen to sway the coin’s price that it becomes almost impossible to keep up.
Now I’ll show you why people believe that the Bitcoin bubble has burst.
The Bitcoin Bubble
People tend to define financial bubbles in many different ways. For simplicity's sake, I’ll split it into three major parts.
- At the very beginning, the price of an asset is very low and not noteworthy. It fluctuates a bit but is at a constant low most of the time. This is where people don’t give the asset much attention, it still hasn’t participated in any notable situations or events to get noticed.
- At a certain point, the asset starts gaining traction and rising in price. The thing that differentiates this growth from any other normal asset growths is intensity - the price rises with increasing intensity and speed. This happens because while people see that the asset is promising, they also want to invest in it and make a quick profit. The more people start joining in the bandwagon, the faster the price inflates - just like a bubble.
- The third and final stage is the breakdown - just as the price rose without any apparent reason, so does it fall. This is where people start panic-selling all of their assets, fearing that the price will crash even more and they’ll lose money. This becomes a never-ending cycle until the price of the asset does completely crash - or, in other words, the bubble bursts.
Now, with the above-given knowledge in mind, take a look at the graph below:
Does this remind you of something?
This is the Bitcoin price chart, from the moment of its inception up until the present day.
As you can tell, this chart has most of the features of a bubble - a slow and stale beginning, a sudden peak and then an equally sudden drop. But the last part is a bit different - the price didn’t drop to zero. Furthermore - it seems to have stabilized.
This is often one of the main visual arguments that Bitcoin supporters use when trying to disprove the claim that Bitcoin is a bubble. When such a financial bubble bursts, the price hits dead zero fast, and there’s usually no chance for recovery. When it comes to Bitcoin, however, we can see that that’s not the case.
So is Bitcoin a bubble? Let’s analyze some of the more common “for and against” arguments to get a bigger picture.
FOR
People who answer the question “is Bitcoin a bubble?” with a positive answer have a few big arguments to back up this claim.
First of all, they say that Bitcoin simply isn’t tangible - it’s a decentralized currency, which means that no one government would back it up. Fiat currencies have a certain amount of stability because they have huge banks and governments that support them. Additionally, they’re sanctioned and even incentivized - you can pay your taxes with fiat currencies and use them for other official matters. When it comes to Bitcoin (and most of the other cryptocurrencies), however, this is not the case. Different governments tend to sanction Bitcoin in very different ways simply because it doesn’t have a concrete owner - no one person or organization controls the cryptocurrency in question.
Another big argument is that Bitcoin was simply overhyped and inflated far beyond measure. It was the first phenomenon of its kind - there were a lot fewer people that bought it to use it when compared with the number of people who wanted to simply flip it - buy it low and sell it high.
Since the crypto-coin didn’t have a strong enough backing of supporters that cared for its well-being, the price kept on being inflated by those who were simply looking for ways to make a quick profit.
Because of Bitcoin’s volatility, governments around the world have decided to sanction and tax it’s usage, with some going as far as actually banning the cryptocurrency. This was one of the main factors that led to Bitcoin’s huge crash in price.
Probably one of the strongest arguments that claim Bitcoin to be a bubble is that it’s simply too clunky and, well… old.
Now, cryptocurrencies like Litecoin, IOTA and Ethereum have managed to surpass Bitcoin in almost every aspect possible. Litecoin is four times faster than Bitcoin, IOTA is technically superior and Ethereum is an actual network that is used to build and create other cryptocurrencies. Every day, we see new and heavily improved cryptos enter the market - Bitcoin was the original one, and the staple for cryptocurrencies in the mainstream, but how long can this reputation last until people start realizing the coin’s drawbacks?
AGAINST
Even though asking the question “Is Bitcoin a bubble?” has become common within the various crypto communities around the world, there are a lot of people that still believe in the cryptocurrency and scoff at any claims of it being a bubble. Let’s try and analyze the main arguments that people have when answering “no” to the question “is Bitcoin a bubble?”.
First of all, even though Bitcoin’s price does fluctuate heavily, that doesn't mean that it hasn’t got any consistent value. As I’ve mentioned in the chapter above, people tend to value Bitcoin for many different reasons. The coin has become a real-world example of a currency that doesn’t require any centralized jurisdiction nor governance - its value is dictated by the people that use it. This, in turn, lends a solution to why Bitcoin is not a bubble.
While some investors are adamant that Bitcoin has reached its demise, others have no problem with investing in something that is considered to be volatile.
A lot of people see Bitcoin as a financial gateway - how many times on the internet have you come across various comparisons involving Bitcoin? Comparisons like:
… This Bitcoin faucet, which was founded back in 2010, originally gave out 5 Bitcoins per user - that would be $20 000 USD today! …
Some investors put money into Bitcoin mainly BECAUSE it is volatile - they hope and expect that the coin’s price will skyrocket in the near (or far) future. That is why the argument for Bitcoin’s inconsistency isn’t a valid reason to write it off as a plain bubble.
Additionally, when talking about why Bitcoin is not a bubble, it is worth pointing out that the coin had maybe four or five “bubble bursts” throughout its lifetime. People have been asking the question “Is Bitcoin a bubble?” for the longest time now - and the cryptocurrency has always risen from the ashes.
Truth be told, this is the biggest crash that the coin has ever experienced, but as you probably saw from the graph I’ve shown earlier, it has already begun stabilizing. A lot of the Bitcoin supporters believe that even though this time the fall was more significant, it’s still just that - another fall out of many.
Is Bitcoin a Bubble?
So, now that we’ve talked about the “for and against” arguments for why Bitcoin is a bubble and why Bitcoin is not a bubble, what is the actual conclusion? Is there one at all?
Whatever the case might be, it is evident that Bitcoin has been a game-changer by multiple definitions of that term. This goes both for digital marketplaces and social opinions.
Throughout the years, Bitcoin has had its ups and downs. Every single time that the coin crashed in price people rushed to predict various things - from major rises in just a matter of hours to absolute falls or, in other words, “bubble bursts”.
However, when asked “is Bitcoin a bubble?”, it would be quite naive to have a cold “yes” or “no” answer.
One thing seems almost certain - if Bitcoin is a bubble, it hasn’t burst yet. The coin’s price has stopped falling and is now slowly but surely climbing up again.
Various global events dictate Bitcoin’s price fluctuations - while some governments ban cryptocurrencies, others embrace them. Every single day there’s countless amounts of news surrounding various events related to cryptocurrencies. Some of these news reports are positive, others - not so much. What’s for certain, though, is that all of these events influence Bitcoin’s price in one way or another, and while the coin has a real and actual use, people will use it.
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Conclusion
If you would ask different people “is Bitcoin a bubble?”, you would probably constantly get different answers. Some people would reassure you that Bitcoin is far from even resembling something like a financial bubble, while others would swear that the “Bitcoin bubble burst” has already happened a long time ago.
If the crypto-coin in question IS a bubble, but it’s still alive, then when will the Bitcoin bubble burst? Well, the answer is pretty simple - as soon as it stops being useful to the general population.
There’s a golden rule in the cryptocurrency world which says that crypto will remain alive and thriving as long as it has an actual, applicable usage. And when it comes to Bitcoin, it doesn’t seem that it will lose its usage any time soon.
When asked “when will the Bitcoin bubble burst?”, probably no one could offer a solid, concrete answer. Even though there have been a lot of similar situations throughout history (the financial crisis of 2008, the Mississippi bubble burst, etc.), Bitcoin is a bit different than all of them. The fact that this cryptocurrency is decentralized has its drawbacks, sure, but at the end of the day, it’s probably also its biggest strength.
So is Bitcoin a bubble? Well, only time will be able to tell. Even if that is the case, it has certainly yet to burst.
I hope this guide was useful to you. Try to keep up with the Bitcoin-related news, always do as much research as possible and you should be able to form your own opinion on the question “Is Bitcoin a bubble?”.
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