Is bitcoin a bubble?
Before answering it, let’s first understand what a financial bubble is.
A financial bubble occurs when a huge gap is created between the fundamental values and market values of the asset. Though it could be unpredictable, understanding the five stages of a bubble can go a long way in helping the investors and stakeholders.
According to the economist Hyman P. Minsky, in his book Stabilizing an Unstable Economy(1986), there are 5 steps to any financial bubble.
1. Displacement
2. Boom
3. Euphoria
4. Profit taking
5. Panic
For more details on the Financial bubble: https://www.forbes.com/2010/06/17/guide-financial-bubbles-personal-finance-bubble.html?sh=5a80bbbe7af3
So, Is bitcoin really a bubble?
Well, Bitcoin was surely labeled a bubble by many attributed to the crash of 2013, and 2017. Below are the reasons for these crashes:
Crash of 2013:
- China banned all entities including financial institutes from dealing in bitcoins.
Crash of 2017:
- Cryptocurrencies banned by many governments.
- A single entity manipulated the price of bitcoin thus pushing it into the PANIC stage. (https://www.researchgate.net/publication/342185292_Is_Bitcoin_Really_Untethered)
- Initial Coin offerings: As it was in the EUPHORIA stage, a lot of people invested in cryptos without understanding it.
However, the above reasons are no longer applicable as bitcoin is not in the unsustainable bubble that can be manipulated or banned in any way that will question its existence and usage. Below are a few reasons according to some experts:
- Participation from big players and financial institutes.
- Accessibility has increased due to many Crypto exchanges.
- Regulation of the cryptocurrency ecosystem by many governments.
- Maturing decentralized finance use cases and market.
Originally published at https://www.linkedin.com on January 18, 2021.