Bitcoin is in a bubble.
That’s according to some. Billionaire investor Mark Cuban, BBC’s technology correspondent Rory Cellan-Jones and best-selling author and currency expert Jim Rickards are just a few names that spring to mind who are claiming this.
Yet, even if this is the case, surely that’s not necessarily a bad thing and may even be a good indicator as to where the market is heading. With bitcoin’s market cap worth $75.3 billion, at press time, it’s hard to consider the currency in a bubble in the long-term.
Jon Matonis, founding director of the Bitcoin Foundation and nChain’s vice president of corporate strategy, said to CoinJournal that speculative bubbles do exist for digital currencies, but to a larger extent in the alt-coin space.
“As bitcoin has matured, its price volatility has been more tempered and now it behaves more like a safe haven currency for some of the other alts,” Matonis said.
In the past, prices have risen and fallen for things; however, they have managed to continue. Take for instance the Dutch tulip mania in the 17th century. During 1636-1637 tulips were being sold at a premium. As a result, traders were resorting to selling their homes, life savings and land to acquire more tulips. However, as with any speculative market, those who had profited wanted to cash in. This then created a domino effect causing the price to drop as more people sold their tulips. Subsequently, panic ensued and just as quickly as the market had risen it collapsed sinking the Dutch economy into depression.
Today, we know this as the first example of an economic bubble, yet demand for the flower continues. Also, consider the dot-com bubble of the late 1990s. Or the housing market, which bubbled and crashed in 2008. Both of these markets appear to be fine today.This may certainly be the case for bitcoin too.
The market has already seen bitcoin’s price drop from over $3,000 in June to below $2,000 in July as it underwent a market correction. Nevertheless, demand for it continues. So much so, that bitcoin’s price is now trading over $4,500. As a result of its continued dominance research suggests that it could become a major reserve currency by 2030.
Speaking to CoinJournal, David Motta, Internet entrepreneur, investor and CEO of business consulting firm, ACQURE Business Solutions, said that a bitcoin bubble is a good thing.
“These recent events make me agree even more with Sir Richard Branson on the fact that volatility is not necessarily a bad thing [as] fortunes can be made from it,” Motta said. “For the savvy investor who is positioned right bubbles can be a blessing.”
Of course, while the price rise in the crypto market raises questions as to how far it will go before falling again, it’s nothing speculative like the tulip mania or the South Sea Bubble in 1720. As Motta states, it’s only a case of when:
“People don’t do any homework to understand what they are getting into and just rush into opportunities where ‘easy money’ is being made [that it fuels] the potential bubble even more.”
As we can been seen throughout history investment bubbles are a natural and normal process. For a relatively new asset such as bitcoin, price bubbles shouldn’t be unexpected.
“Where they become useful however is in building liquidity and bootstrapping the “network effect,” said Matonis. “Price volatility that is usually associated with the early or end of a bubble period provides many opportunities for traders and this is what provides the additional liquidity and depth of market.”
