Whether or not the Bitcoin valuation is a bubble is quite controversial, there are opinions for all tastes. But the truth is that a financial bubble has very serious consequences for the economy when it explodes.
And yet there are those who might think that there is a way to protect themselves against these bubbles: not investing in assets that could be overvalued. But it’s not enough. When a financial bubble bursts it can affect everyone, whether they have invested or not.
Consequences of other bubbles
You do not have to go back a lot to see the effects of a bubble burst in the economy. At the end of the 90s we lived what was later called the dot-com bubble. In those days of exuberance, the shares of technology companies rose like foam.
When that bubble was pierced, many lost a good part of their savings, but the main problem was that it affected everyone. Unemployment skyrocketed – and not just in the technology sector – and central banks around the world fought it lowering interest rates to very low levels, fueling another bubble: the real estate.
The real estate bubble was really devastating, even for those who were not buying housing. Prices went up, the credit flowed quickly (among other things because interest rates were low and you had to look for profitability) and when it broke affected everyone.
For example, in the financial system faltered, there were very important bankruptcies like that of Lehman Brothers, with 680 billion dollars in managed assets. And unemployment skyrocketed to levels not seen in many decades.
In addition, the Treasury had to prepare rescue plans for financial institutions for almost 700 billion dollars (although it actually spent 400 billion and ended up recovering all the money).Â All this affected both the people who invested in the real estate market and those who did not.
Therefore, it can be concluded that the bursting of a bubble can affect the whole economy. The mechanism is clear: although not everyone invests in overvalued assets, when the bubble burst the resources dedicated to it disappear and there is less money available to invest and spend; On the other hand, states usually have to take measures to counteract the effects, which detracts resources from other places.
The size of the Bitcoin market
However, for a financial bubble to affect the entire economy and not only those who had money invested there, the value that sinks must be large. For example, if the price of a particular company’s stock shoots up and down, it only affects its investors, not the rest of the economy.
The money that cryptocurrencies currently cost is around 250 billion dollars. It may seem a lot globally, but as has been reviewed before the collapse of the housing bubble in the US required the injection of more than 400 billion dollars, and that only in one country. And all this money was to cover a bigger hole, since the balance sheets of the banks could not take the losses.
In a real estate bubble, it is difficult to predict the total cost of market collapse. Some estimates indicate that the value losses reached 1.4 trillion dollars, almost six times more than the total value of cryptocurrencies at present. And that we are comparing the losses of a market with the current total value of cryptocurrencies.
But in the so-called Great Recession, not only did houses fall in value, but it dragged the stock markets, and the total loss of wealth was around 15 trillion dollars in the US alone.
On the other hand, if you look at the dot-com bubble, the loss of value of technological companies in the stock market was around 5 trillion dollars, again very far from the market value of cryptocurrencies.
Therefore, it can be concluded that although a bubble can seriously affect the whole society, it has to acquire an important size, something that has not yet been done.
If we get to see Bitcoin prices above $100,000 then it would be reaching significant levels and a puncture could affect the entire population, regardless if one has invested or not.