TL;DR Breakdown
- Bitcoin price surges have led some financial experts to claim it is a bubble.
- BTC as a bubble is atypical to all the bubbles of the past.
- The cryptocurrency exhibits features of a bubble and anti-bubble.
Since Bitcoin gained wide publicity and more people began to note the level of disruption it has caused to the financial system, many have called it different names and given different opinions about it. Some of them have labeled it a bubble, primarily due to its extreme volatility.
In recent times, the surge in the asset price, which has culminated in breaching the $50k mark, has puzzled some in the traditional finance industry. While crypto enthusiasts keep rejoicing at this massive breakthrough and have made some optimistic predictions about the continued rise, skeptics have continued to claim that Bitcoin has no intrinsic value. As such, it remains the “mother of all bubbles.”
This piece explores the possibilities of the leading crypto asset being bubble-like or if the skeptics are just reluctant to accept the new reality.
Can we call Bitcoin a bubble?
To determine if BTC is a bubble is not as simple as it sounds. Cliff Asness, the co-founder of Capital Management, in a paper, stated that one of the most overused words is “bubble.” In his opinion, several things determine if a particular occurrence is a bubble or not. And deciding what amounts to a bubble can never be objective.
However, he stated that for the word bubble to have any validity, the asset price should be such that there is no logical outcome in the future that can justify it.
Proponents of Bitcoin as a bubble theory have also been saying it has no intrinsic value. But is this so? Most people who are investing in this digital asset do so to hedge against the debasement of fiat currency. This is looking more and more likely with time. Quantifying that in monetary terms is, however, not relatively easy.
Determining the fundamental or underlying value of Bitcoin is hard. Even as skeptics continue to say it has no intrinsic value, Bitcoin has continued to prove many wrong.
The virtual asset has not fallen in value like most underlying fiat currency. Neither has it been affected by the weak economy. The digital coin cannot be monopolized to the benefit of only a select few.
It appears impossible to attach a baseline price to an immutable, censorship-resistant token that serves as a means of payment while also, at the same time, counts as a store of value. To establish bitcoin as a bubble, it must be possible to show that its price is in no way related to its underlying value. This, however, looks impossible in today’s world.
The economic hardship caused by the pandemic led to an increase in dollar supply all over the world as the US government looked to jumpstart the economy. At the same time, demand stagnated. Now that the world is slowly recovering, there is a fear of inflation. And this has been one of the factors increasing the underlying value of Bitcoin as more people see it as a way out of the economic mess caused by traditional financial institutions.
Bitcoin as an anti-bubble
While skeptics see Bitcoin as a bubble, another school of thought sees the digital coin as an anti-bubble. For there to be an anti-bubble, there must first be a bubble. Proponents of Bitcoin as an anti-bubble have found a perfect one.
To understand what makes Bitcoin an anti-bubble, one only has to look at what motivates investors to buy the asset. At present, the biggest motivation is that investors believe that the government will print more money as it attempts to kickstart the economy again which would lead to an inflated economy.
If this happens, it affects the valuation of many companies that are mostly dependent on the low-interest rates. If the bond bubble should burst, these interest rates will be among the first things to go up. Thus, this makes BTC attractive to these companies as a way of protecting themselves from the risk of inflation.
To better understand the nature of Bitcoin as an anti-bubble, you only have to imagine the fundamentals of value BTC would have in a world where governments have a balanced account and central banks do not print more money. In this system, there is no fear of financial repression.
In such a world, the demand for Bitcoin won’t be this high and the same thing with the price. Thus, these factors drive the rise in the price of the crypto king, making it a veritable anti-bubble. However, The digital currency seeming to be an anti-bubble doesn’t automatically mean its price will not fall. Anything is a possibility in the uncertain world of the finance market.
While many skeptics generally point out that Bitcoin has no intrinsic value to make their claim, this is not enough. According to Alan Gotthardt, money itself has no intrinsic value except in the faith of the issuer. And this is gradually becoming applicable to BTC too.
Final words
It is nearly impossible to determine if Bitcoin is a bubble or anti-bubble as it exhibits both features. Diego Parrila, a foremost economist, has the opinion that the leading virtual asset is 80% bubble and 20% anti-bubble.
However, Bitcoin is gradually establishing itself as a worthy alternative and competitor to the traditional banking system. This will expose it to more regulation, taxation, or even prohibition in extreme cases. So, in the end, it becomes less and less of a bubble, and more people might begin to view it as an anti-bubble.
The real question comes: Is this financial bubble being generated by temporary overoptimism about real innovation that can still pay off in the long run? You may give us your POV in the comments.
