All Financial Wisdom

When Will The BitCoin Bubble Burst?

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The Bitcoin phenomenon is on the news every day. The debate over whether or not it is a bubble has been accentuated lately. Until recently, I thought not, but now I think so. It is always difficult to determine what a bubble is until it explodes, I will try to explain why I believe now that we are now living in one.

Trust, key to Bitcoin

I always said that something, whether it was gold or Bitcoin, had value if there was widespread confidence in it and if there was a shortage. Bitcoin is programmed to be low and thus meets one of the requirements. The second piece is that of trust, and it can be seen from the rapid price increases we’ve experienced this year that there is a large group of people who trust in its value.

For something to have value, it is enough for a group of people to trust it. The rest of the world will grant this value by association. For example, when Europe threw itself into colonialism, gold only had value on the old continent. But because gold had value in Europe and the rest of the world wanted to trade with the conquerors, gold gained value in the rest of the world as it was a tool that allowed trading.

The key to whether or not Bitcoin is a bubble is whether the group of people who trust it blindly will continue to do so in the future. The rest of the world does not matter, as long as there is a group that relies on its value, Bitcoin will have it (by extension).

Phases of a bubble

Bitcoin’s strong rise in the last few years should have indicated that maybe we are in a bubble, right? Until recently I thought that it was not a bubble for two reasons:

1.It is a scarce commodity.

2. There are many people who assign it a real value and that number continues to increase.

And there are but two observable risks: That the encryption algorithm could be cracked and that the governments would fight against the virtual currency. But there is a greater risk.

Why is it a book bubble?

The problem of seeing a bubble from within is that all the data is solid: you know people who trust the currency, there are more and more believers everyday, and there nothing but upwards indicators… it is very difficult to leave this small world and look with perspective on what’s happening.

The first bubble known or accurately described by history books was that of tulips in Holland. Although they arrived in Europe in the 16th century, it was not until the 17th century that they became fashionable. And they went up in price – by a lot, and extremely quickly.

What was a decorative plant became a good business, since they could be bought and resold later for more money. That is, people began to speculate with them. The tulips are beautiful, there was nothing like it until then, and there was solid demand. What could go wrong? The problem is that they(tulips) really don’t serve any purpose (other than to decorate) and when people finally realized, prices plummeted.

With Bitcoin something similar happens. Although it is a scarce commodity, it serves no purpose. It has no legal tender, there are hardly any businesses that accept it (except illegal ones and some business that want to advertise even though it is impossible to set a price in Bitcoin due to high volatility) and its value is based strictly on the trust of its users.

In addition, the increase we are seeing is based solely on the arrival of more and more capital. That is, the volume of purchases of Bitcoin is increasing, as in all bubbles. That’s why the price goes up. New capital arrives above the rate of creation of new Bitcoin (it is well designed to be scarce).

Therefore, when the music stops, when people realize that they are putting money, real money into something that is useless, the bubble will explode. The price will sink, the volume will be reduced.

This is basically what the CEO of JP Morgan said a few days ago, and he has been criticized for doing so since he is an interested party (since Bitcoin could be an alternative financial system to the current one). And so it is. But we must remember that even in the biggest bubbles, like the real estate one, there was an underlying asset that was worth something. In this case, however, Bitcoin is useless. (The blockchain technology is quite another thing). It is very dangerous to put the money there.

There would be those who say to me: But what about gold? It is of no use and yet has value. True. The utility of gold in the industry is marginal compared to the use that is given in jewelry or simply to store wealth. But there is a great tradition, centuries of history. Not here, and therefore the house of cards is more fragile.

When will the bubble burst? I do not know. No one can know. Time will tell.

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