Partners
Bitcoin bubble

Is Bitcoin condemned to be the next speculative bubble?

Tom Urbaschek
Tom Urbaschek is currently studying for his Economics and Business economics bachelor’s degree (BSc). Writing for Asset | Economics' Blog Committee is one of his extra activities alongside his study. Subjects of his interest are the fields of behavioural economics, marketing and macroeconomics.

With a market cap of approximately €87.4 billion and a current all-time high price of €5270 (Wilmoth, 2017),  Bitcoin’s price and success seem to be heading through the roof and beyond. While hitting the €1000 mark in mid-January , the price has since increased with almost 430%. Taking into account these  extraordinary numbers, the main question arises whether Bitcoin will be the next speculative bubble.

First and foremost, Bitcoin’s future depends on the landscape of the crypto currency market. Bitcoin holds a share of 59% at the moment, significantly outweighing other currencies like Ethereum and Ripple, with a market share of 16% and 4.5% respectively (Wilmoth,2017). The future of crypto currency market has not been clearly defined yet and therefore is uncertain. Governments could for instance decide to create their own crypto currency or impose a system which allows businesses to create their own online currencies. Bitcoin could exist alongside these other crypto currencies, but one cannot know whether its price will significantly drop or steadily even out.

What explains the popularity of Bitcoin is one of the most frequently asked questions and has multiple answers.  For instance,  Bitcoin transactions are anonymous, so they cannot be tracked. Bitcoin also introduces the system of Blockchain, putting pressure on banks with an innovative method of speeding up transactions, as carefully explained by Jerȏme Crijns in ‘Why care about Blockchain?‘. Bitcoin has a fixed money supply of 21 million BTD with a mining system, which gets more expensive when you get closer to its limit. In this regard Bitcoin is very similar to gold. That is why Bitcoin is bound to hold a minimal value, even if its price drops radically. The downside is that large market players are able to affect the price, making Bitcoin’s price insecure.

Bitcoin’s price could plummet when it gets declared illegal, with the probable reason that it is the federal government’s job to create and regulate a currency. In this scenario governments and the business sector do not acknowledge the currency, which is nowadays usually the case, and people who do still trade Bitcoins will be seen as criminals. However, Bitcoin could overcome this and could continue to exist as a currency on the black market and the dark web, which it is already being used on.

However, Bitcoin could get universally acknowledged as a certified paying method in the future. Although this is not very likely considering the hostility towards it since its introduction,  some businesses have adopted it. This would mean that Bitcoin’s price would be less volatile, with fewer major drops in price, due to less legal actions and skeptic  politics, securing a more stable future.

Recently, the Internal Revenue Service stated that Bitcoins are an asset for tax purposes. This is an important development, because by imposing a tax the IRS implies to acknowledge Bitcoin. However, this news had a mixed effect on the price of Bitcoin, because a tax makes Bitcoins less profitable. It also could be a signal for even more regulation in the near future, for example in the form of a digital currency tax, regulating specific crypto currencies. Speculation and profits will in this case be lower, thus scaring away traders and investors.

“I Don’t Understand Bitcoin.” – Gary Shilling, Wallstreet Analyst

Finally, this quote defines the premise of one of the biggest threats for Bitcoin. Shilling does not understand Bitcoin, and therefore does not wish to use it. Intuitively this statement makes sense, resulting in a lot of people, from politicians to potential traders, using it. Taxation or other regulations imposed on Bitcoin could make trading even more complex.

In conlusion, it cannot be stated with certainty whether Bitcoin will be a speculative bubble or not. Its future is unclear due to plenty external  factors. As Bitcoin at first sight seems to be a classic example of a balloon about to burst, one should take into account the specific characteristics, like its prominence, anonymity, and creation.

 

Reference list

Wilmoth, J. (2017, Oct. 21). Bitcoin Price Climbs to $6200 as Record-Setting Advance Continues. Retrieved from Cryptocoinsnews:
https://www.cryptocoinsnews.com/bitcoin-price-climbs-6200-record-setting-advance-continues/

Crijns, J. (2017, Oct. 16). Why care about blockchain? Retrieved from Offthecharts:
http://offthecharts.nl/2017/10/why-care-about-blockchain-longread/

Young, J.(2017, Oct. 20). Wall Street Analyst Gary Shilling: I Don’t Understand Bitcoin. Retrieved from Cryptocoinsnews:
https://www.cryptocoinsnews.com/wall-street-analyst-gary-shilling-dont-understand-bitcoin/

2 comments

Leave a Reply

Your email address will not be published. Required fields are marked *