Bitcoin bubble about to burst: Is the cryptocurrency craze over?

By Anshia Dutta 

The start of 2018 has not been very pleasant for most of the cryptocurrencies in the market. With only the completion of the first month of the year, Bitcoin has whipsawed investors with its value falling below $8000 for the first time since November 2017.

The Bitcoin bubble shows signs of bursting

A bubble is an economic cycle that is characterised by a rapid upsurge in prices that exceed the intrinsic value of the asset by a huge margin which is followed by a contraction.

The first step in the creation of a bubble is displacement. It starts with the investors being enamoured by a new paradigm. Following this displacement, prices start to rise with more number of eager participants entering the market, thus setting the stage for the boom phase. With a large number of new entrants every day, the prices skyrocket with the valuations being asymptotic to the extreme values. This phase is called euphoria. The fourth stage is profit-making. Here, participants enjoy higher valuation of the asset and earn profits by indulging in trading. Lastly, at the final stage, panic sets in. During this time, the asset prices reverse course and start to descend as rapidly as they had ascended. Everybody wants to liquidate their assets in order to avoid incurring losses. Now, with the supply exceeding the demand, prices further plummet.

Now, Bitcoin is also showing the signs of a bubble. It was a staggering $19,511 in December 2017, but today it has wiped out more than half its value with its price falling below $8000. Facebook’s ban on cryptocurrency ads, regulatory threats from authorities from across the world, fears of price manipulation, and the $500 million heist at Coincheck Incorporation, a Japanese exchange, are the reasons for bitcoin experiencing a setback.

Lukman Otunuga, a research analyst at Forextime Limited said, “Bitcoin is in trouble. Price action suggests that bears are clearly in control, with further losses on the cards as jitters over regulation erodes investor appetite further.”

Consequences of the burst

Since the bitcoin has been showing signs of a burst, a growing number of big credit-card issuers in the United States (US) are backing out from financing the cryptocurrency. JPMorgan Chase and Company and American Corporation are now barring people from purchasing bitcoin and other cryptocurrencies using their credit cards. Secondly, Bank of America has started to decline credit card transactions with known crypto exchanges. In addition to this, Long Blockchain Corporation who was set to purchase mining equipment for bitcoin and other currencies has now stepped back.

Bitcoin has tumbled by 21% during the past week, its biggest five-day decline since 16 January 2018. Along with Bitcoin, rival coins have also experienced a decline in prices. On 2 February 2018 alone, Ripple was down by 38%, Ethereum fell more than 32%, and Litecoin also declined by at least 28% as losses continued to spread like a wildfire across cryptocurrencies.

Nouriel Roubini of Roubini Global Economics said, “Bitcoin is the biggest bubble in human history and this mother of all bubbles is finally crashing. And it isn’t just Bitcoin. There are more than 1,300 cryptocurrencies or initial coin offerings, and most of them are even worse than the largest digital token. These constitute a bubble to the power of two or three.”

The future of Bitcoin

According to experts, the intrinsic value of bitcoin is very hard to determine on account of the currency being volatile and the possibility of trading practices having manipulated its behaviour in unregulated exchanges. There is a difference of opinion between the two groups – economists and investors.

On one hand, Joshua Gans, the Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship at the University of Toronto said, “It’s down 60% from December. This is already a burst bubble and it could burst some more, all the way down to zero.”

On the other hand, Cole Diamond, the CEO of Coin square said, “What we’re seeing with the wild dips and spikes in the value of cryptocurrencies is the market correcting itself. It’s healthy correction. It’s not a bubble because it started at zero and it has to increase over time.” 

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