Is Bitcoin a bubble?
A few years ago, Bitcoin was not yet well known. The people who owned this currency were mainly “innovators” with a considerable amount of technical knowledge. Nowadays, things are different. More and more people use Bitcoin as a means of payment, and there are even more people who invest in Bitcoin. This increases the risk of a bubble.
On this page, you will read more about Bitcoin as a bubble. You will learn what a bubble is, but also whether Bitcoin is indeed a bubble. Finally, we will tell you more about the consequences of the possible bursting of the Bitcoin bubble and the likelihood of this scenario.
What is a bubble?
In the 1990s, the internet sector was performing very well. Internet companies were experiencing golden times, and therefore more and more people decided to invest. Due to the many investments in the internet sector, stock prices rose rapidly. Eventually, the increases went a bit too fast: the internet sector collapsed.
The situation in the 1990s was later called the ‘dot-com bubble’. The internet bubble made many people rich, but also made many ‘victims’. Many investors lost a lot of money because of their investment in the internet sector.
The dot-com bubble is the perfect example of a bubble. This phenomenon is also called a speculative or financial bubble and occurs when the nominal value of a good is higher than the intrinsic value. This happens, for example, when goods are based on impossible future expectations.
Many people wonder if Bitcoin is a bubble
The value of Bitcoin
If there is an explosive increase in value, a bubble can arise.
When we consider Bitcoin, we can certainly say that the value of this cryptocurrency has risen significantly recently. At its peak, Bitcoin even reached a price of more than $60,000.
After every significant increase, the Bitcoin price also drops again. Therefore you could say there have been dozens of bubbles in the Bitcoin price. However, so far, the price has always risen significantly again after the price dropped.
How can you recognize the next Bitcoin bubble?
Bubbles usually follow a fixed pattern. You can try to recognize in which phase Bitcoin currently is. This way, you can determine whether it might be wise to buy or sell Bitcoins.
Phase 1: Innovation
A bubble almost always starts with a new innovation. In the past, this was, for example, the invention of the internet or exotic flower bulbs.
Bitcoin is also an innovative technology; for the first time, it is possible to bank entirely decentralized via the blockchain without the supervision of third parties!
Phase 2: Optimism
More and more retail investors invest in Bitcoin blinded by greed. In this bubble period, the price almost continuously rises, and Bitcoin receives a lot of positive media attention.
People lose sight of the risks and invest blindly. This was also the case during the 2008 crisis, where house prices continued to rise. At a certain point, as a society, we forget what can happen when things go wrong.
Phase 3: Speculation
As the price continues to rise, more and more investors want to invest. They hope that the price will continue to rise, and they do not really believe that things can go wrong. Some people even start investing in crypto with borrowed money, which is never a good idea.
Phase 4: Euphoria
The new technology, in this case, Bitcoin, is getting more and more attention in mainstream media. Through influencers, the price rises even further, and people have more and more confidence in the future of crypto.
Phase 5: Panic
Something goes wrong in crypto land, and the price begins to show cracks. Retail investors panic; wasn’t Bitcoin only supposed to go up? More and more people sell their crypto, causing the price to suddenly drop significantly.
After the end of the bubble, we can start again at phase 1. Often, necessary lessons are learned, making Bitcoin, crypto, and the blockchain perform slightly better in the next phase. Unless confidence is ever really lost, there may be no new all-time high.
Bitcoin as a Bubble
Given the explosive value increases followed by explosive value declines, we can call Bitcoin a bubble. In a sense, Bitcoin has already seen several bubbles.
However, the Bitcoin bubble does not necessarily have to burst. The value of Bitcoin can slowly continue to rise without popping, but it can also slowly decline. Only if the value continues to rise explosively, the chance of a burst is significant. Therefore, be cautious when the price of Bitcoin rises explosively; the chance of a significant decline is than also greater.
Opinions are divided on whether Bitcoin is a bubble. Some experts call it a significant bubble that could burst at any moment, while others still have faith in the digital currency. Thus, whether Bitcoin is a bubble is difficult to answer.
Bubbles in the Bitcoin price development
What are the biggest crypto bubbles so far?
2011: Multiple booms and crashes
In February 2011, the price of Bitcoin rose to $1.06, only to drop back down to $0.67 due to various posts on the social network Slashdot.
In June 2011, the price rose again to $29.58 and then dropped to $2.14 in November. The price rose because the cryptocurrency received attention in Gawker, an article about the Silk Road, a website that offered illegal drugs.
2013 boom & crash in 2014-2015
In November 2013, the price of Bitcoin rose to $1,127 and then slowly collapsed to $172.15 in January 2015.
The price dropped during this period because China decided to ban cryptocurrencies.
2017 boom & 2017 crash
This crash is also known as the Bitcoin crash or the great crypto crash. After an enormous price surge, the price dropped more than 80% between January 6th and February 6th of 2018.
The crash began with a CBS article about fraud surrounding BitConnect. This British company promised high returns but was not registered with the relevant regulators. However, other factors also contributed to the crash:
- There were rumours that South Korea would ban cryptocurrencies.
- Coincheck, the largest Japanese crypto OTC market at the time, was hacked, resulting in $530 million in losses.
- Facebook, Google, and Twitter banned advertisements for ICOs.
ICOs strongly contributed to the eventual collapse of the crypto market. At that time, there were many shitcoins & scam ICOs that decreased trust in crypto.
At the end of the year, Bitcoin’s market capitalization fell below $100 billion, and the lowest point of $3,100 was reached in December 2018.
2020-2022 Cryptocurrency Bubble
Bitcoin (and other cryptocurrencies) surged during the pandemic as a lot of money was printed and people were staying indoors, leading to more investment in crypto. The price eventually peaked at $64,000 on April 14th.
There were many excesses during this time in the crypto market. For example, Dogecoin surged 20,000% in one year without adding much real value. The price then declined by over 34% in just one weekend.
The price of Bitcoin and other cryptocurrencies then dropped multiple times. Elon Musk, for example, stated that they would stop accepting Bitcoins due to their impact on the environment. Although there was some recovery, the price then fell sharply. Some factors that contributed to this include:
- Rising interest rates led to sharp declines in tech stocks and crypto.
- Problems at various crypto companies, such as the Celsius Network and the stablecoin Tron, led to further declines.
- The cryptocurrency FTT crashed, and FTX went bankrupt, causing users to lose their funds.
- The largest stablecoin tether lost its connection to the US dollar.
What Are the Consequences of the Bursting of the Bitcoin Bubble?
Suppose Bitcoin does indeed become the new bubble and eventually bursts. What would happen?
Large Losses
All the people who have invested their money in the coin will lose their investment. They may still have some money left, but the value of their investment will decline significantly.
Regulation
However, a possible burst in the Bitcoin bubble also has an advantage. If the Bitcoin bubble bursts, there is a high chance that regulations will be established around the digital currency. With these regulations, a potential next burst can be prevented.
Buying Opportunity
The collapse of the Bitcoin price can also lead to a great buying opportunity. When a bubble bursts, many people panic and sell everything as quickly as possible. The price then goes into free fall. However, this free fall is not necessarily in line with the actual decline in the value of the coin.
Famous Bubbles From the Past
The Bitcoin bubble is, of course, not the only bubble from the past. Below, I briefly discuss other famous bubbles from history:
- Dutch Tulip Bubble (1634-1637): At the peak of the tulip bubble, a tulip was worth more than a canal house. At that time, you could buy a tulip for 6,000 guilders, while the average salary of a skilled worker was around 150 guilders per year.
- Japanese Real Estate Bubble (1986-1991): During this bubble, the prices of stocks and real estate skyrocketed. Even in 2022, the Japanese stock market has not recovered from this bubble.
- 2008 Bubble: In the period of 2008, almost anyone could get a mortgage, even when it was not financially advisable based on their income. When the bubble burst, more than 20% of all homes in America were underwater.
- Dotcom Bubble (1997-2000): This bubble is most comparable to the crypto bubble. When the internet was new, everyone invested in often-worthless internet companies. Prices rose enormously and then crashed.
The dotcom bubble and the price trend of the Nasdaq
Will Bitcoin fail?
Currently, experts, analysts, and investors still have confidence in Bitcoin. The likelihood of Bitcoin completely collapsing is therefore minimal. However, there is a high chance that the price will still collapse regularly. It is therefore important to minimize your risks as much as possible when investing in Bitcoin. Spread your investment and only invest money that you can afford to lose.
Is Bitcoin worth it?
When you see all these ‘Bitcoin bubbles,’ you may wonder if Bitcoin is worth it. In the past, Bitcoin has risen tremendously, even recently between 2021 and 2022, the price increased by more than 1000%.
This is the problem with crypto: all cryptocurrencies are essentially bubbles. There is no intrinsic value behind them, and the enormous increases are entirely caused by investors pouring money into them.
However, it is absolutely possible to get rich with Bitcoin. It is essential to understand that it is a zero-sum game, though. You earn money because other investors (later) lose money. The value is entirely determined by people willing to exchange increasingly large amounts of money for cryptocurrencies.
Bitcoin is not seen as a solid investment by the big banks. However, as a private investor, it can be interesting to take a gamble, but it is important to only do this with money that you can afford to lose.
