Every time Bitcoin reaches a new all-time high media attention and criticism increase. As part of this a lot of critics suggest that Bitcoin is in bubble territory and a huge correction is unavoidable. To support this conclusion economics compare Bitcoin to historic events, like the tulip mania and the dot-com bubble. The question however is, if such comparisons are justified. Because Bitcoin is a totally new technology in a different time it is not easy to compare it with other technologies or events. Despite that I will try to give my point of view about the risk of a bubble for Bitcoin.
First it is important to realize that people have the urge to predict future events. In doing so historic information and their current way of thinking (their framework) is key. As we all know it is almost impossible to predict the impact of large technological changes. The rise of the internet, the Iphone or Bitcon and the Blockchain are good examples of this. No one knew what the impact of these technologies were on the long term. What I am trying to say with this is that historic information can be used to make good predictions, we however have to be carefull to overestimate the power of such predictions in the case large technologically innovations.
Whit this in our mind I will try to give my point of view based on the tulip mania and the dot-com bubble.
Tulip mania
The tulip mania is considered to be one of the first economic bubbles. From 1634-1637 tulip prices have increased exponential to values equal to houses or ten times an annual salary of a regular person. Somewhere I understand the comparison between the tulip mania and Bitcoin. Also Bitcoin has exponential growth in a short timeframe which, like during the tulip mania, is based on speculation. According to critics Bitcoin has no underlying value and speculation therefore is based on nothing but air (the bubble). In my point of view critics however do not take all the important elements in consideration. It seems that they ignore the fact that the underlying value of Bitcoin is the new technology in which decentralization and limited possibilities of manipulation by governments and/or banks are key. Due to this purpose of the technology, Bitcoin can be a alternative for storing value and possibly for regular bank transactions. Unlike Bitcoin, tulips were not created for such a purpose. The exponential growth was completely the result of speculation based on nothing but air. Speculation regarding Bitcoin however is based on the belief that the technology will be an important way of storing value in the future.
Dot-com
After the emerge of the web browser in 1994 the adoption of internet has increased enormously. A large number of tech companies (also known as the .com companies) were trying to obtain a piece of the growth. Due to euphoria and speculation based on this, prices of tech companies increased significantly during 1997 to 2000. As an indication, the value of Nasdaq increased from $ 800 in 1997 to $ 5,000 in 2000. After the burst of the bubble the Nasdaq lost almost 80% of her value.
The last years Bitcoin has seen exponential growth as well, which is related to a new technology such as the internet. Based on this the comparison between the dot-com bubble and Bitcoin is understandable and could mean that Bitcoin indeed is in bubble territory. However, as mentioned before, critics are ignoring some important facts related to dot-com as well. First of all critics do not make distinction between other events during the same period. For example, during the same period (2000-2002) the recession was also caused by the terror attack on 9/11, some important tax reforms and the implementation of the Euro. All of these events have had a major impact on the global economic situation and therefore also in tech companies. The exact size and impact of the dot-com bubble is therefore difficult to determine.
I believe that the most important element that is ignored by critics is the value of tech companies as per today. Both Amazon and Google were active during the dot-com bubble and are despite that the most valuable companies in the Nasdaq today. Furthermore the Nasdaq has seen a growth to a value to approximately $ 6,800 today, which is higher than the high of 2000. Despite the enormous correction during the dot-com bubble, speculations at that time seem to be correct after all. Maybe critics are using an incorrect timeframe to identify the bubble. Based on this it is possible that Bitcoin will see some huge corrections in the future followed by a (quick) recovery. In my point of view a large correction followed by a recovery is not a bubble. The recovery will confirm that speculation is not based on air.
Finally there is the difference in size. Were the market cap op the top 10 Nasdaq companies is $ 4,700 billion, the market cap of all crypto’s is only $ 343 billion (of which $ 191 billion is the market cap of Bitcoin). The question is to what extent we can say there is a risk of a bubble while the Bitcoin market is so small compared to other markets. As long new investors join the crypto market, it is possible that the value of Bitcoin will further increase in the future. Given the size of the forex market (trillions) this doesn’t seem unlikely.
Conclusion
Predicting Bitcoins future and the question if Bitcoin is in bubble territory seems to be an important topic. Economists, and mainly the critics, try to predict a massive price drop of Bitcoin as result of a bubble. Their predictions are based on historic events for which they believe it’s a good prediction for how Bitcoin will develop in the future. Based on the given point of view in this article we can conclude that critics are wrong in the events they use to make their predictions. In the comparison to the tulip mania, critics possible unfairly ignore the fact that Bitcoin has a actual underlying value (technology) in contrast to tulips and that they unfairly use a short timeline to analyzing the dot-com bubble. I believe we have to accept that we are not always able to predict the future based on historic events, especially for new technological in an new era. Possibly accepting this will help to adopt Bitcoin, other crypto’s and the blockchain in general, which can lead to a better world.
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The unleashed power of the atom has changed everything save our modes of thinking and we thus drift toward unparalleled catastrophe.
- Albert Einstein