The bitcoin bubble: Myth or reality?

By Meghaa Gangahar

Among the cryptocurrencies that have established their niche in the financial world, the bitcoin remains the most popular one. It has been escalating at dazzling rates over the years, especially over the past few months.

The bitcoin has grown over the years and nearly touched the colossal figure of $3000 per coin on 12th June 2017. Due to its highly volatile nature, it was not able to hold on to the figure and finished at $2,599 that day. This was, however, below the threshold predicted by Goldman Sachs.

Bubble trouble?

Even though the cryptocurrency has been up by about 180 percent in 2017, its near-term performance appears rough to Goldman Sachs’s technical strategy head, Sheba Jafari. She expressed her concern over the strongly negative fluctuations in the value of the cryptocurrency. Moreover, she is not the lone predictor of an impending dip. Billionaire and investor Mark Cuban, despite his optimism towards cryptocurrencies in general, suspects that the most recent rally for the bitcoin is a sign of a bubble. According to him, the recent ease of making money via the cryptocurrency serves as evidence of the bubble and is a cause for concern.  

Looking for red-flags

Recently, three large Chinese exchanges have resumed withdrawals of the cryptocurrency. This has, to an extent, helped stabilise the world market for bitcoins. Japan’s decision to legalise bitcoins, along with positive sentiments from Korea, has caused an upward pressure on its valuation. However, this only explains part of the rise. It’s recent trajectory resembles a virtual ‘tulipmania’ (the 17th-century craze for Tulips), where speculation of rising prices encourages more demand.

Sceptics have been looking out for the red flags that usually spring up with easy profits and are worried about long-term price stability. These fluctuations raise concerns due to investors’ reaction to volatility. Last month, for instance, when the currency’s price took a hit and dropped to $1900 from $2700, some investors panicked and sold their holdings – not realising that it was a temporary shock.

Signs of a downward slope

The bitcoin, however, faces an obstacle as its developers cannot agree on a way to increase the number of exchanges the system is currently able to handle. Due to this, a transaction becomes as expensive as $4 and also involves a long confirmation period. If they are unable to reach a solution, investors may flee to other feasible cryptocurrencies, leaving the bitcoin in a slump. Another factor hinting towards a stumble is the fact that the currency’s market cap (as a percentage of all cryptocurrencies) fell below 50 percent and is continuing to fall. From a level of above 80 percent, it recently fell to 42.3 percent and is expected to fall further.

Hard as any coin

Although the currency faces obstacles hindering its rise, people such as Nathan Martin of Economic Edge claim that the bitcoin is not in a bubble after all. One of the reasons for this is decentralisation, referring to the fact that the bitcoin is not owned by any single banking system and hence cannot be manipulated. Another reason is the limited supply of bitcoins at 21 million coins. This ensures stability, considering that the market is currently at 80 percent of supply. One other factor is the security involved due to encryption. This stops external manipulation and the blockchain technology, which tracks the coins, eliminates the chances of fraud.

Featured Image Credit: Visual Hunt