The Bitcoin Bubble Burst
A brief about Bitcoin & Blockchain
In 2009, Bitcoin, the first cryptocurrency of the world came into existence. It was invented by Satoshi Nakamoto who designed it as a peer to peer payment transfer system in which the users can do transactions without intervention from banks or other central authorities. Anyone with the knowledge of networking, cryptography can get bitcoin free of cost by using mining it.
Mining is a process in which computers compute an encryption function called hash. Initially, successful miners used to get 12.5 bitcoins every ten minutes by computing a number below the preset threshold. The scarcity of the bitcoin is assigned to the fact that at every 4 years, the bitcoin supply to miners halves.
The technology maintains a publicly distributed digital ledger called Blockchain which records all transactions. It is very much similar to a traditional bank’s ledger and is open to view by everyone. Using an open-source Bitcoin software, miners can verify transactions and can get rewarded in bitcoins. It is called as Blockchain because the recording happens in blocks and each new block is connected with the previous blocks in the form of a chain. Blockchain enables to maintain records using the democracy of the miners rather than using a centralized authority.
Is really the bitcoin bubble burst or it is just a little slow down before the huge success?
Let us explore a bit about the Bitcoin price history to understand its characteristics. It started with 0.008 $ in 2009 and gained parity with the dollar in February 2011, rapidly increasing, i.e., more than 300% price rise. It reached 1000$ for the first time in 2014. Fuelled by mainstream public awareness and the development of secondary markets called Bitcoin exchanges, in which people can buy from existing bitcoin owners, the prices have increased to 19700$ in 2017 in a single year run. 2018 witnessed the start of Bitcoin price fall triggering the discussion of bitcoin bubble bust.
A classic speculative bubble has the following characteristics:
● Its price is volatile and based on the speculation of those who are trading the asset
● It has no inherent value; it is based on the perception of the market
● The market is filled with exuberant investors who drive up the price to insane levels during optimistic times and drop down quickly
Bitcoin market has the all the characteristics of a speculative bubble. It is primarily because of the widespread bitcoin speculation that the price will only continue to increase which means the prices are driven to insanely high levels.
Since the beginning of 2018, the bitcoin prices started to fall, and the bloodbath does not seem to stop. The market is marred by declining demand from customers, rising prices, and the ever-shrinking availability. Several pioneers such as Warren Buffet, CEOs of banks such as JP Morgan, etc. have expressed their skepticism about bitcoin. Most consider bitcoin as a Ponzi scheme which can dupe users taking advantage of their interests.
Since there is no inherent value for a bitcoin and its price is only dependent on what the receiver is willing to pay, the moment the interest wanes or the price becomes exorbitantly high; the bitcoin market prices would crash. It is a matter of when, not a question of how. Large markets such as South Korea and China are moving to ban cryptocurrencies altogether. It is not a legal tender anywhere, and the legal use cases for bitcoin is shrinking. It will be no surprise if the price drops well below 10,000$ within 2018. Bitcoin prediction 2018 can be highly volatile and only time will tell the truth.
The pro-Bitcoin group has expressed that even though the price of Bitcoin has the characteristics of a bubble, it would remain stable in the long term because the value generated by Bitcoin is stable. The one thing everyone agrees is that even if Bitcoin goes out of fashion, the blockchain technology is going to stay and there will be a rise of many more cryptocurrencies which can replace bitcoin.
People have acknowledged that it can become a global force of technology fuelled by widespread adoption. Even if the price bubbles break, the profound significance of the blockchain technology which created a distribution of trust earlier can pave the way for the egalitarian, decentralized society.
People interested in blockchain technology can diversify their risk by investing in other cryptocurrencies such as Ethereum, Litecoin, Ripple, etc. which has more price rationality build in with the price.