Bitcoin is a Bubble
Bitcoin has just hit over $7,000 recently. We have posted several times about Bitcoin and how to effectively market your business using Bitcoin. One thing I want you to understand is that Bitcoin is a bubble. We see many economists and commentators speaking on this subject. Some will say that yes it is a bubble, yet others will claim it is not a bubble.
It is true that Bitcoin is a currency and we are not debating that fact. Stores have the ability to take Bitcoin on platforms through Bitpay and other means as I discussed in This Post. This was the original intention of Bitcoin, but that doesn’t necessarily mean this is how it is being used now.
Here I believe we are somewhat of the mania phase. The first sell of came in 2013 in November when the Chinese government caused it to drop hundreds of dollars over night. We are somewhere between enthusiasm and delusion on this chart. The media is giving it attention finally and lending credibility to Bitcoin. The problem is that Bitcoin is not being used as it originally was intended. People are buying Bitcoin now simply because the price is going up. Many people holding Bitcoin can’t tell you the intrinsic value behind it or how to make a purchase online. As a general rule you shouldn’t invest in anything that you can’t explain to other people.
This is different than bubbles in the past like the tech bubble for example. In the tech bubble the stocks being purchased were at least tied to ideas, and the investors could tell you a reason why they purchased the particular stock because they thought the idea was a good one. Most of those companies failed because it was a bubble and so many new ideas were coming out at once. Many of them weren’t viable so they fell in price very quickly.
Bitcoin Price History:
The above chart from Coin desk is given the arrows as modification to illustrate some of the Bubble phases. The price was steady for a few years before taking off in 2017. More governments are taking notice of the currency. Where there is hyper inflation within a country Bitcoin can help the citizens of that country pay for goods. We have seen Venezuela reach hyperinflation this year. The Chinese government is restricting the outflows of capital to keep Chinese citizens investing within the country of China. When things like this happen the people turn to Bitcoin as a means to subvert a government that is trying to exert control over the wealth of its citizens. In this way Bitcoin is very useful.
In Bitcoin is more of a technology that the world is getting used to known as the block chain. It wasn’t necessarily the Smart Money that used Bitcoin at the beginning but more the early adopters. These people told their friends about it who were interested in the same things, and you see for years it was worth under $10 until 2013. It also isn’t the institutional investors that drove the growth either, this was more public driven the whole way from the beginning until now.
So here we see the innovators are the people who invented Bitcoin, then they developed a community around it who became the early adopters. These people told all of their friends who also became interested and formed an early majority. We are moving in to a phase where the media is getting involved. Now people are seeing the up trend in the price, they want to buy.
How will this end?
This will end like every other bubble in history. Before there was a stock market, there were bubbles. Even tulip prices made people rich in the 1600s through futures trading on Tulip bulbs. here is the chart:
We don’t know when the crash will happen, but we do know what will happen after it does. After Bitcoin crashes, you can expect a response from governments world wide. Governments will move to ban Bitcoin exchanges like coin base or any others that facilitate the exchange of the crypto currency. It is likely that some of these people running the exchanges will go to prison because that is what governments do, over react.
The initial cause of a crash will probably be a large scale hack of the largest exchanges like coinbase that will cause the price to drop significantly over night. It is impossible to predict when this will happen or if this is what will happen at all. Bitcoin is a bubble though and it will crash with or without a hack on an exchange. People will one day realize that their is no intrinsic value behind the currency that gives it the value it has attained today. Blockchain technology is not proprietary.
If you have Bitcoin, you probably don’t believe anything you just read. I would remind you that the Tulip investors didn’t believe the Tulip prices would crash, the Tech investors didn’t believe the tech bubble would end, the Housing investors didn’t believe the housing market could crash, and the oil investors didn’t believe the oil price would crash.
In all of these cases, a crash happened. Most recently we saw Oil drop from $100 a barrel. Don’t let cognitive dissonance get in the way of rational thinking regarding Bitcoin, you are not smarter than every single investor in history that has lost money on a bubble.
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