Is Bitcoin A Bubble?
From the beginning of 2017 to the end, we saw bitcoin raise from around $1000 to a whopping $12,000.
Especially in the last part of the year, where it essentially doubled in a few short months, this rapid growth has been speculated by many investors to be a bubble that is just waiting to pop.
Should you be concerned?
Should you pull your money out?
Should you choose not to invest in it?
On the other hand, what if it isn’t a bubble and you miss your chance to buy this rapidly growing currency while it’s still cheap?
In order to answer these questions, let’s analyze what a bubble is, and see if bitcoin falls into this definition.
What Is A Bubble In The First Place?
From the NASDAQ, an economic bubble is defined as:
“A market phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset. Bubbles are often hard to detect in real time because there is disagreement over the fundamental value of the asset.” [emphasis ours]
Bubbles are often characterized by big surges in price, followed by a rapid reduction in price when investors are no longer willing to pay that high price, at which point massive selling occurs and the price deflates.
The analogy of a bubble describes this idea so well because it conveys how the price is inflated and inflated until it hits an unsustainable point, at which it collapses, or “pops”. Those keeping up with the markets can sell at this high price and profit, while the majority of people lose their invested money as the price plummets and what they own becomes worth much less.
As an example, with the housing bubble in 2008, we saw the housing market increasing, increasing, and increasing - until it hit a point when investors decided “these houses are not worth this much money”, stopped buying them, and instead decided to sell.
Collectively, the majority of people began selling because of this inflated price above the value of the house, causing the value of the houses to decrease rapidly.
Many people are fearing that bitcoin and all the cryptocurrencies are a bubble, and because of the rapid growth we’ve seen lately, it’s not a big jump to assume that these fall into the same category as the housing bubble in 2008 or the dotcom bubble in the late 90’s.
But looking at the history of bitcoin (and the cryptocurrency space in general), we quickly realize that it was created in response to the housing crash - the decentralized nature of the currency ensured that something like that couldn’t happen again.
So if it was created to prevent the sort of bubble we’re talking about, then could it really be a bubble itself?
In order to explain this, we first need to look at what even gives value to Bitcoin in the first place.
What Determines The Value Of Bitcoin?
Bitcoin is a decentralized “store of value”, meaning that it holds whatever value we place on it.
It’s not backed by any physical asset, which often confuses people into thinking it’s a scam. But in reality, what gives bitcoin value is the same thing that gives gold value - scarcity and public demand.
There is a set amount of gold, making it a “scarce” commodity. We can’t simply “make more of it”, and so when the public demand for it rises, the price naturally increases.
Bitcoin is the exact same thing.
Think about it - gold has no “inherent” value. You can’t use it for much other than storing value, and the few practical uses of gold (in technology, etc.) do not account for the price of it.
The price is determined solely by the fact that if you have it, and someone else wants it, there is a price they would be willing to pay for it. We all collectively agree that it’s worth a certain amount, and so it is. There’s no need to have it “backed by an asset” because the recognized public value of it is all that matters.
And as we saw from the definition above, a bubble is when the asset price far exceeds the fundamental price.
But bitcoin has no fundamental price - it’s completely reliant on supply and demand, and since its supply is set in stone (at 21 million bitcoin), that means it’s value is based on demand and nothing else.
Because of this, it can’t be a “bubble” in the traditional sense - it can only increase or decrease in value based on demand. And because a decentralized currency with all of benefits and solutions to current economic problems is in such growing demand, the price of bitcoin will continue and continue to increase for quite some time now.
Note: There are 2 scenarios where bitcoin will not continue to grow:
One is where another cryptocurrency outperforms bitcoin, making it mostly obsolete but still a backup store of value (similar to how gold is mostly obsolete but still a backup to current money).
The other is if the government creates a totalitarian state and restricts our free use of bitcoin and the internet, similar to what China did, in which case we have a much bigger problem on our hands.
Given these possibilities and the fact that bitcoin still has a long foreseeable run ahead of it before another cryptocurrency steps in, it’s a good bet that it will continue to rise for some time (but of course we recommend that you invest in several of the top rising coins to be safe, particularly bitcoin cash and litecoin, both of which are lighter, faster versions of bitcoin).
However, all of this assumes that bitcoin is nothing more than an inert asset, which couldn’t be further from the truth.
Most Importantly: Bitcoin IS Money
Yes, Bitcoin is not being accepted everywhere just yet, but it IS rapidly being adopted by many businesses, and even Amazon will be accepting it soon.
Because it is a currency that can be spent, it IS money, and money can’t pop.
Only assets that rely on money can pop, because the asset doesn’t warrant the relative amount of money attenuated to it.
But the money itself is only subject to the supply and demand of it - especially when it is not being artificially regulated by a government or institution, and is instead reliant only on the people that use it.
The price of bitcoin may occasionally spike or dip above or below the actual monetary value of it, but it will always settle back at a level based on its use in the global economy. And of course this use is growing as we move away from relying on governments and third-party institutions.
For example, you wouldn’t just hold onto US dollars in hopes that they will go up in value. You would spend it and use it, because it’s use as a currency is stable. In fact, it’s value is going down, making it a particularly poor investment.
Bitcoin, on the other hand, is still growing in its use as a currency, and it has long way to go.
But the real kicker here is that Bitcoin and other cryptocurrencies are a superior form of currency, as we discuss in The Beginner’s Guide To Bitcoin.
Because of this, it’s rise as a currency will initially cause its value to rise, much like an investment would, while simultaneously being an actual spendable currency like the US dollar in the example above.
To make this clearer, consider how we would’ve transitioned from gold-based money to paper-based money in the past (one of the evolutionary steps of currency).
Initially, many people and businesses would’ve stuck to trading gold, but a few early adopters that recognized the benefits of paper money over gold money (convenience, transferability, etc.) would start using it. Because not many people and businesses would’ve accepted it at this early stage, its value would’ve started low.
But as people began to catch on that “hey, this paper money is actually much better than using gold”, more and more people would’ve began using it, and its value would’ve risen.
It would’ve kept rising until eventually it became the primary currency, at which point the only things affecting its value would’ve been the continued use of it by people and the total supply of it (which was determined by the government).
Bitcoin and other cryptocurrencies are the same thing, and the reason we at GCA are so passionate about them is that we recognize how it is a superior form of currency - much like paper money was superior to gold - and we want to help you become an early adopter in order to reap the monetary rewards that will come when cryptocurrencies start becoming accepted as primary currencies.
But it’s up to you to recognize this movement towards a superior form of currency, to support it through your investment in it and use of it as money, and finally to reap the rewards that comes from spotting this inevitable evolution.