Is Bitcoin a Bubble?

Summary of the article:

  • Goldman Sachs and Capital Economics commented that Bitcoins cannot replace fiat currencies
  • JPMorgan CEO backpedaled his harsh comments on Bitcoin saying “it is real”
  • It is not important whether Bitcoin is in bubble or not, what important is whether people are ready to use it or not
  • Governments are for citizens not other way around

What is a bubble?

“A bubble is an economic cycle characterized by a rapid escalation of asset prices followed by a contradiction” – Investopedia. History has examples of bubble events. In the Kingdom of Netherlands, in 1636 there was a period called “tulip mania”. The demand for tulips was extremely high but supply was less. Accordingly, the price of a single tulip surged the top. An average price for a tulip was higher than the annual income of an average skilled worker, Investopedia.

An annual income of an average skilled worker in Canada is 70.336 CAD (equivalent of 57.102 USD), according to a report published in Macleans.

And soon people realized that the price for tulips was overwhelmingly high than their actual value and tulip mania bubble burst in 1637.

Above-mentioned example is “old-enough”, say some critics, but there was the same scenario happened between 1995 and 2000. It is well-known as “dotcom bubble”. Investors poured in as they saw the ‘potential’ to get profit through the Internet. But, when investors saw that the whole market was going down and “not growing”, they withdrew their capital and the collapse followed.

Juanjun Miao, a professor at the Boston University, wrote on Journal of Mathematical Economics (2016, 139 page): “For a bubble to emerge, there must be some sorts of frictions to limit arbitrage. One fiction is the incomplete market participation”. The question remains whether we will witness Bitcoin’s “incomplete market participation” or not.

One of the reasons for bubble to emerge is when a value of a product rises at unprecedented rates after which ‘investors’ pour in without any solid strategy.

 What Capital Economics said about Bitcoin?

Capital Economics is London based economic research consultancy agency and it has more than 5.000 publications each year. The agency has explained about Bitcoin bubble in their research as follows:

  • “We think ‘extremely unlikely’ that cryptocurrencies will replace established fiat currencies”.
  • “In any case, most people are buying Bitcoins, not because of a belief in its future of the global currency but because they expect to rise in values”.
  • “The more Bitcoin becomes the mainstream asset class, the greater risk of fallout from a crash”.
  • “Even if Bitcoin is a flash in the pan though, the blockchain or distributed ledger technology behind it has the potential to be a longer lasting development”. They added: “not only could it (Blockchain) transform the financial system – removing the need for banks to act as intermediaries – but it could have applications elsewhere, for example, in maintaining tax and hospital records.”
  • “When it will fully burst is anyone’s guess prices could yet rise again before they fall further ahead”.

What Goldman Sachs said about Bitcoins in “(Un)Steady As She Goes”?

Goldman Sachs is an American multinational finance company that engages in global investment banking, management and securities. The company expressed its views on Bitcoins in the investment research under the title: (Un)Steady as she goes. Here is what the company said earlier this month:

  • “We do not believe that these cryptocurrencies will retain their value in the long run in their current incarceration”.
  • “Some investors may be led to believe that the US dollar will lose its status as the global reserve currency, replaced by cryptocurrencies of the era. Obviously, we view the unsteady cryptocurrencies as no much for the’steady as she goes’ dollar”.

What JPMorgan CEO said?

JPMorgan is an American multinational banking and financial services agency with a revenue of 96 billion USD in 2016. Here is what James Dimon, the CEO of JPMorgan said:

Bitcoin is “a fraud” and will “blow up” said on Tuesday, 19/Sep/2017 in a bank investor conference in New York, Reuters report.  However, he backpedaled his comments on Bitcoin and Blockchain on an interview with Fox Business saying that he “regrets” calling Bitcoin “a fraud”. He added: “Blockchain is real”, Fox report, January 9th, 2018.

Why Economists believe that Bitcoin is in a bubble?

Bitcoin is highly volatile digital currency. Its value can drop thousands of dollars within a night and regain in a couple of days which makes it “unstable” currency.

Market Control is in the hand of small number of people called “whales”. According to Bloomberg, whales hold 40% of Bitcoin Market. There is a chance that once they reach their ‘desired point’, whales can sell out their assets creating afterwards ‘public panic’ which could lead to Bitcoin bubble to burst.

Bitcoin has anonymous transactions. Bitcoin uses Blockchain technology which storages all anonymous transactions as an open source. Accordingly, governments and banks are “not ready” for such “shift” and they will try to manipulate in one way or another. China is a good example of it and the European Union is on its way to start influencing on cryptocurrencies.

Bubbles in pictures:

John Paul Rodrigue has created the picture illustrating a typical bubble:


Now let us have a look at Bitcoin Price chart in the World Coin Index20180127_135155

As you can see, Bitcoin has reached its peak in December and since then is staggering the same way as it went up. Economists claim that this is a classic bubble.

What Bitcoin users say?

Historically, humanity has seen many drastic changes throughout ages in a monetary system. First, people used materials like salt or animal horns as money. Periodically, there was a shift from salt or animal horns to gold or silver. After, they changed their way of using money from gold to banknotes. Since then until now, we have been using banknotes. However, there is a shift of “paper-based currencies” to a new era of “digital currencies”, according to Bitcoin users.

Bitcoin is decentralized and non-inflatable. There are growing rates of inflation every single year. Bitcoin cannot be subjected to inflation and the currency is based on mathematical calculations. As a fact, mathematical calculations are better than bank regulators.

Bitcoin is easily sent and received 24/7. Usually, banks have certain working hours, but Bitcoin is open for sell/buy and transfer every day of the week, without working hours nor break hours.

Bitcoins are convenient. Considering the fact that 21st century is technology and innovation era, Bitcoin users believe that it is time to move to digital currencies.

Bitcoin can end poverty. According to a report published in Business Insider, there are two billion people who do not have bank accounts. Bitcoin users believe that it can end poverty because everyone can access to it through their phones or other devices to make trade deals within or outside of their countries. Additionally, migrant workers can send their hard earned money in Bitcoins with very small fees, rather than sending the exact the same amount of amount through banks or money transfer agencies who take an enormous amount of commission rates.

According to Coin Market Cap , there are 1494 cryptocurrencies available with the capitalization of 564 billion USD. I think that the majority of those cryptocurrencies will be sorted out eventually, and the healthier ones like Bitcoin and Ethereum, whose market capitalization exceed the rest of all cryptocurrencies (301 billion USD), have a chance to survive. But I do not exclude the Bitcoin bubble theory either considering the fact that governments are “not ready” for such shift. The question is whether people are ready to use cryptocurrencies… If they are, then governments have to adopt them as well.

Governments are for citizens, not other way around – Yousuf Farkhad (@yousuffarkhad)



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