How To Decide If Bitcoin Is A Bubble

One of the biggest stories in the financial markets in 2017 has been the skyrocketing price of crypto currency Bitcoin. Beginning the year right around the $1,000 mark, Bitcoin soared to $3000 earlier this year before pulling back. Now in the past few weeks bitcoin has gone from $1900 on July 16 to over $4300 per coin this morning, August 14, 2017.

This is a stunning rise and level of volatility for a currency. Yes, Bitcoin isn’t your standard paper currency like the dollar or the Yen, although perhaps that’s one of its biggest advantages. In either case it’s stunning to see any commonly traded asset experience this kind of price movement. Of course one of the main questions many wonder, is if we are witnessing a bubble that’s about to implode.

There are interesting points to both sides of the debate, although rather than try to convince you of either view, instead here are a few things that might help you better form your own opinion.

At the very least I found them helpful as I continue to think about what’s likely to happen next.

Do you already understand what a Bitcoin is and have experience using it?

I find that many of the naysayers of Bitcoin often don’t understand the cryptos, what they are able to do, and why the crypto community seems so passionate about their currency.

At some point, at least hear the opinion of someone who understands and actually uses one. It’s not the easiest concept to grasp, but that isn’t a reason to discount it. In either case learning more about what a crypto actually is before deciding if it’s a bubble can be a good first step.

What do you expect to happen to currencies like the dollar?

If the dollar fractured tomorrow, whether Bitcoin is perfect or not it’s likely that people would be flocking to the crypto market to get any remaining value available for their dollars. If you think the dollar market is sustainable and don’t foresee any cause for concern, that lessens the attractiveness of the Bitcoin investment profile.

How many people do you think actually own a Bitcoin?

Traditionally one of the common traits of a bubble is that a lot of people own the asset and there are no sellers. Yet how many people on an average high traffic street do you think actually own a Bitcoin. 1 out of 100? 1 out of 250? More? Less?

Yes, there appear to be some larger money flows going into the cryptos over the past few months, but there’s still not that much actual ownership among the public.

Do some of the cryptos have a backing?

Andrew Maguire is developing Bullion Coin, a gold backed crypto. Reggie Middleton has developed Veritasium, that’s in a sense backed by the value it can offer to large system infrastructures.

So even if you don’t see much value in cryptos as pure currency, there are other reasons people are getting involved.

Personally I continue to believe that the cryptos are going to play an increasing role in our future. Especially as the borrowing and printing nears its breakpoint, I do think we’ll see continued price escalation in the cryptos.

However what can help you make your own decision is considering questions like these as well as what you come up with on your own, and then making the decision that feels right to you.