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The irony of the debate over a bubble is that bitcoin was born just six weeks after Lehman Brothers went bust, as people searched for an alternative to the existing monetary system. The conversation had died down until the financial crisis resurrected it. It came to be embraced by libertarians as a way, like gold, to store wealth. Silicon Valley then joined the bitcoin crypto-rush, interested both in the technology and its potential as a way to raise cash.
Wikipedia: “A situation in which asset prices appear to be based on implausible or inconsistent views about the future. It could also be described. In financial terms, a “bubble” is a state where an asset stays stale for the longest time, then explodes and its price.
Bitcoin has, however, been hit by crisis and scandal. It first entered mainstream consciousness as the currency of the Silk Road, the online black market where drugs were sold. Two major bitcoin names have also ended up in court. Charlie Shrem, who set up Bitinstant in which the Winklevoss twins invested , went to prison after being convicted of aiding and abetting an unlicensed money transmitting business, a charge related to the Silk Road.
The cryptocurrency movement will only expand. The main worry about bitcoin is initial coin offerings or ICOs becoming the latest financial fad. This is where it starts to look like a bubble. Ethereum is a cryptocurrency, but also a platform for apps, allowing developers to sell a stake in the app by issuing tokens with ICOs. Scammers can use blockchain technology to create ICOs that perhaps look promising but are essentially flimflam.
Where is the money coming from? Analysts say it is often from those who bought bitcoin on the cheap some years ago and are now millionaires.
A UK watchdog, the Financial Conduct Authority, warned that anyone thinking of buying coins in an ICO should only do so if they are prepared to lose everything. One banker likened it to the South Sea Bubble of the s, where a company bought up the rights to trade in the South Seas, then sold shares in its company which eventually become worthless.
The so-called gold standard has been abandoned though in the 20 th century, and now fiat currencies are backed mostly by the faith that individuals and groups have in it to store value. We have to turn to the qualities that make a currency valuable to see if Bitcoin fits the bill and hold intrinsic value. The first important determination is scarcity.
Here, Bitcoin simply outclasses the competition. Ever since its inception, there has been a limit number of Bitcoin that will ever be mined: 21 million. Secondly, an asset must be a good medium of exchange.
This is also a domain Bitcoin excels at, since the fees to transfer sums of money of any size are quite competitive compared to the traditional banking sector. Third, Bitcoin has to have utility to be worth something. While there was a time when very few accepted Bitcoin as a mean of payment, with the arrival of big players such as PayPal and Square, you can now use your Bitcoin to settle transactions with millions of shops around the world.
Bitcoin is also hard to steal, impossible if stored properly.
Due to blockchain technology, it is also impossible to counterfeit or destroy. Bitcoins belong to their holders, and while scams are still an important issue, they are not exclusive to the cryptocurrency space. The answer to whether Bitcoin is in a bubble lies in how much one Bitcoin is worth, but not in dollars.
Its intrinsic value is dependent on the characteristics that define any currency. Bitcoin might be unique, its own category of currencies, but that does not mean it cannot be judged by the same rules as every other.
Furthermore, it does so better than all of its competitors. If we consider currency to be a means of facilitating exchanges between individuals, then Bitcoin has several advantages compared to its competitors.
In the short term, Bitcoin will certainly see some pullbacks. On a very short scale, we might even say that Bitcoin is in a bubble. Aleh Tsyvinski Arthur M. Okun Professor of Economics. Why is bitcoin still going up? Is it a bubble? A decade in, has bitcoin made a case for why we need digital currencies?
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