Is Bitcoin a Bubble

Is Bitcoin a Bubble? Here is what you need to Know

Bitcoin is highly volatile. The swinging crypto prices have created unimaginable fortunes for some investors whose positions have been favored by some great market moves. On the other hand, some people have lost a lot of money when the Bitcoin price drastically falls. For example, one of the grate swings was recorded between late 2021 and October 2022. Bitcoin sold for over $68,000 in November before dropping to $19,000 in October 2022. That is over 70% drop in barely a year.

Since people do not want to lose their money to a bubble project, one of the commonly asked questions about Bitcoin is: “Is Bitcoin a Bubble?”

What is a Bubble?

Charles Kindleberger defines a bubble as an “increase in market prices that cannot be justified by its fundamentals”. An economic bubble involves trading in an asset at a price that strongly exceeds its intrinsic asset value.

Financial bubbles can be found throughout history from Dutch Tulip Bulb Mania in the 17^th century to the United States real estate bubble in the early 21^st century. These bubbles are seen only in hindsight. Until one happens, it is difficult to distinguish a bubble from a merely volatile business, or even a rapidly growing one.

Bitcoin is definitely volatile. However, is it a bubble?

Well, some prominent leaders have expressed their opinion on this question. Some generally doubt the underlying value of cryptocurrencies including Bitcoin, while others believe that Bitcoin has a bullish future.

Skeptics of Bitcoin

Warren Buffett is a prominent figure who has expressed skepticism about the blockchain future. Speaking at Berkshire Hathaway’s annual shareholder meeting in 2022, Buffet, who is the company’s longtime CEO stated that he would not buy all the Bitcoin in the world for $25. The foundation of Buffet’s criticism is the idea that Bitcoin cannot generate income for its owners – unlike, for instance, a company dealing with products and services. Instead of generating value, Bitcoin relies on the next person paying more to buy it. Such an asset is not sustainable according to one of the world’s richest persons.

Jamie Dimon, the JPMorgan Chase CEO also a confessed “major skeptic” of Bitcoin. He believes cryptocurrencies, including Bitcoin, are digital Ponzi schemes. However, his criticism does not extend to stablecoins, which he believes would be sustainable if properly regulates.   

Who Believes in the Future of Bitcoin?

Twitter founder, Jack Dorsey, is one of the prominent people who believe Bitcoin is sustainable. Jack Dorsey has a lengthy track record in tech and finance. He is the CEO of Block, the parent company of Cash App and Square. Jack Dorsey attended the 2021 Bitcoin conference where he said that Bitcoin is one of the most important things to work on in his lifetime. In specific, he believes that Bitcoin stands out against all other cryptocurrencies.

Marc Andreessen is another popular figure backing Bitcoin. He is a tech entrepreneur who invented the first modern internet browser. He also invested in companies such as Airbnb, Slack, and Facebook, as a billionaire venture capitalist. Marc Andreessen has been a firm believer in Bitcoin for years now. His investment firm, Andreessen Horowitz invested in multiple crypto-related projects, including Coinbase. Andreessen believes that Bitcoin is offering the opportunity to reimagine how the financial system should operate in the internet era.

Is Bitcoin a Bubble?

It is hard to tell whether Bitcoin is a bubble partly because it is difficult to determine the real value of Bitcoin.

One of the factors that make Bitcoin valuing particularly difficult is that Bitcoin has not been around for so long and hence has a short track record. New financial projects including companies can be volatile. The prices may swing significantly as the market finds the project’s fair value. The drastic changes in the Bitcoin price may give an impression of bubbles forming and popping.

Another point is that Bitcoin is fundamentally different. While investors may have criteria to assess the value of a company, including the new ones, the approaches do not work with Bitcoin. Bitcoin is not a company and does not generate value (which is why people like Warren Buffet have a problem with it). Therefore, it is difficult to determine its value.  

Also, the increasing scrutiny by the regulatory authority could give an expression of Bitcoin being integrated into the financial systems of various nations. Furthermore, some reputable traditional companies such as Visa, Mastercard, and Fidelity, are working to bring Bitcoin into the mainstream.

Overall, it is worth noting that Bitcoin’s user base is rapidly growing every year. Thousands of brilliant open-source developers are joining the community to work on improving the Bitcoin network daily. And the increasing interest by governments, corporates, and individual investors could paint a picture of a trusted project that could be here to stay. On the other hand, Bitcoin has expressed some characteristics of a bubble including numerous speculative boom and bust cycles in the past. The largest cryptocurrency may still have a long way to becoming a stable currency.

While the opinion remains divided on the future of Bitcoin, anyone who decides to invest in the digital asset should follow the golden rule: Never invest more money than you can afford to lose.