19 NOV 2020

Is Bitcoin a Bubble in 2020?

Comparison with Previous Bubbles (like Dot Com and US Housing Bubbles)
First of all, the cryptocurrency sector is compared to the two most famous bubbles in recent history; Real Estate and Dot Com. The Dot Com bubble started to inflate in the late 90s. By early 2000, the entire sector got hit hard and resulted in hundreds of small, medium and large nascent internet companies seeing their shares plummet and fold.
Here is the graph of the well-documented crash:
Image source: Wikipedia
Is Bitcoin a bubble?
Well, Bitcoin has been called a bubble by many conventional finance wizards and economics experts even since it first started posting considerable gains back in 2012 and 2013. The rhetoric became even more pronounced after the cryptocurrency reached record heights in 2017 and early 2018 close to $20,000, totalling more than $300 billion in market valuation. Previously, not many people knew or cared about it but once it was out in the open, the largest cryptocurrency in the world has been labelled a scam or a bubble every now and then. But, what is the truth? Is Bitcoin indeed a bubble? We will discuss this in this article.

Just for the record, this article will discuss Bitcoin and Bitcoin alone. Other cryptocurrencies and their behaviour are certainly bubble-like and many have failed. However, many of them are Bitcoin copycats and their market performance shows what happens to the pretenders.

On the other hand, the US Housing bubble was a major real estate crisis that contributed to the 2008 financial crisis perhaps more than anything else. During the years 2006, 2007 and 2008, the US housing market went in a downward spiral in spectacular fashion. Here is its graph.

Image source: Wikipedia

Bitcoin started back in 2009 and it only has had 11 years of existence. So, the data is smaller but we can see some similar previous action.
Now here is the graph of Bitcoin from the very start of the coin’s inception:
Image source: TradingView
What many of the anti-Bitcoin analysts and economists try to predict is that Bitcoin is following the pattern of well-documented bubbles and therefore, it is going to crash one day as well. But, if you look at it closely, bubbles don’t get back up that easily. It took the efforts of the entire US government and the Federal Reserve to pass a multi-trillion dollar bailout package to help the housing and dot com bubbles. Only then were they able to survive this catastrophic loss. Many of the conventional analysts that heap scorn on Bitcoin helped create these massive crises in these legitimate sectors and then also worked together to provide the bailout packages. This may show that they have experience in dealing with bubbles but it also shows that they were also responsible for creating them in the first place.

Bitcoin was often painted as a bubble back in 2017-2019 when the price index was either increasing or falling considerably. Most conventional economists believed it was all done and there was nothing one could do to save it from the collapse especially when it kept falling back to the $3000-$4000 range from the current all-time high of $20,000 and look at where we are today, again close to bitcoin all-time highs in 2020.

Answering the Criticism
However, Bitcoin didn’t just recover from its previous losses, it recovered stronger than ever and is now looking to test the previous all-time high of $20,000 in the near future. All of this happened without any government or organization help. Simply put, the overspeculated Bitcoin market corrected itself and then gained momentum again all on its own.

For “economists” like Nobel Prize recipient Robert Shiller, he doesn’t know what to make of Bitcoin now. He previously said that Bitcoin was the best example of a bubble because of its rapid increase and resulting price tank. He is now double-minded and said that the Bitcoin “bubble” might even go on for 100 years. If a currency goes on for 100 years, that is surely not the best case study for a bubble, is it? Even the US Dollar only relieved itself of the gold standard around 70 years ago and it is now under huge pressure.

Similarly, other economists who predicted the price of Bitcoin to collapse into nothingness are now unsure of what to make of it while some are openly embracing it as a reserve currency of the future. Because Bitcoin proved itself in the long-run, it is now seeing big institutional investments as well with Grayscale alone investing more than $1 billion in it.

Now for the markets to go up and down is completely natural. It is the very basis of a free market itself. However, Bitcoin’s longevity and fightback have convinced a lot of conventional economists that there is more to Bitcoin than meets the eye. It is a fully decentralized currency with a limited supply that everybody can own and transact.
For many, it is the future and everyone is willing to be a part of it.

Author: Chris Wyatt