Stocks

Is The Bitcoin Bubble Bursting, Or Is It A Market Correction?

If you listen to many in the mainstream media they are calling the Bitcoin bubble burst. Bitcoin has been on a slide since reaching the all-time high in December. But its price is back to where it was just three months ago, not three years ago.

Bitcoin bubble
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Pantera Capital CEO

If you were to ask Dan Morehead, he’d tell you that the Bitcoin bubble is a fallacy. Bitcoin price is definitely volatile and “anything that can go up 10 times in six months can easily go down 50% in a week.” He states that it most likely is not a Bitcoin bubble because many institutional investors have yet to even be exposed to the market. In the next 18 months, he says, a large amount of institutional investment will enter the space.

It’s no surprise that he seems bullish on cryptocurrencies. Pantera Capital focuses specifically on digital currencies, Bitcoin and companies using blockchain technology. As the CEO of a digital asset investment firm he clearly sees value in the markets.

Goldman Sachs Global Investment

Steve Strongin, who run global investment research for Goldman Sachs, says that it is unlikely that cryptocurrencies will survive, even if blockchain technology does become prevalent. So he’s definitely a Bitcoin bubble believer. He believes that there is on intrinsic value in cryptocurrencies. But he also states that fiat currencies also do not have much intrinsic value aside from what the government has imparted. He likens it to people using playing cards as currency in the 18th century French colonies, and even certain types of rocks. The Bitcoin bubble may be comparable to that he says.

On whether Bitcoin and other cryptos will survive, he thinks it unlikely. He calls them the first “modern” experiments in blockchain technology. Then he shows some lack of knowledge citing “many cryptocurrencies have slow transaction times today.” Does he mean slow in regards to other cryptocurrencies, or slow in regards to actual financial institutional money transfers? Either way, it seems an uninformed position. He then goes on to say that the big innovation would be for people to buy big ticket items with cryptocurrencies, like… a Lamborghini?

Bitcoin Bubble Pop

Strongin believes that, given the price of late, we are seeing a Bitcoin bubble and it’s ready to pop. He states that it is because it is a speculative market and there is little intrinsic value. He likens the current Bitcoin bubble to the DotCom bubble of the 1990s. He cites just Amazon and Google as survivors. Other tech companies that survived include Apple, eBay, Adobe, Intuit, IBM, ARM, Oracle, and SanDisk.

Little Future Sight

Perhaps Strongin was simply afraid to openly embrace cryptocurrencies. When asked about cryptocurrencies being useful for financial markets, he said that cryptocurrencies and blockchain do not offer the speed required for market transactions. Anyone watching price daily, is well aware how fast transactions are processing. If it is a Bitcoin bubble, it’s a fast moving one. He does not believe in the need for a currency untethered from central banks. He also doesn’t believe that there people would prefer cryptocurrencies for daily transaction. Here’s his position in summation on their usage: They are cheap to store, easy to conceal and hard to trace. He’s implying that only criminals see value in them.

Commodities Not Currencies

Again we come across the idea that cryptos are commodities and not currencies. The first was in the CFTC and SEC testimonies before Congress today. Commodities, according to Jeff Curie, Head of Commodities Research at Goldman Sachs and his team, “have no obligation or liability to any government, company, or other entity.”

Oxford’s definition is twofold. One, “a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.” Two, “A useful or valuable thing,” like water. Meanwhile, their definition of currency is thus, “The fact or quality of being generally accepted or in use.” and “A system of money in general use in a particular country.” Curie’s team calls Bitcoin the first digital commodity as opposed to other assets which have been digitized thank to technology adoption.

Ease of Use

The ease of use and access is a welcome aspect in some regions. Specifically, in those without reliable banking, like emerging markets. The other area that likes this aspect, again, are dark or black markets that deal in illicit transactions.

Irrational Exuberance

Authors of the book Irrational Exuberance Charlie Himmelberg and James Weldon, call the massive fluctuations of Bitcoin price, a bubble. They say the recent boom fits the classic definition of a bubble. Their definition states that news of price rise increases investor enthusiasm which is transmitted by “psychological contagion from person to person.” It continues on to say that this then amplifies stories of price justification which further pushes investment.

Again, we turn to Oxford, their definition in this particular facet of the word is, “Used to refer to a significant, usually rapid, increase in asset prices that is soon followed by a collapse in prices and typically arises from speculation or enthusiasm rather than intrinsic increases in value. “

So, It’s a Bubble?

Perhaps. Maybe the Bitcoin price rapid rise in December and then its early 2018 price drop was a Bitcoin bubble. Perhaps it was a burp, or a market adjustment. A price conflagration, a holiday swelling. Considering that Bitcoin price has receded back to November rates may just show that people were giving Bitcoin for Christmas. If, as Himmelberg and Weldon, good news affects price to make a bubble, so too does bad news to pop one. If that is the case then yes, we just experienced a compressed bubble zone in Bitcoin price. The price rose in late 2017 at a rapid pace on the back of good news, decent economies and low regulation. Then at the end of the year and through January bad news prevailed and investor enthusiasm was dampened and people sold. Then the price went back to where it was before all the bubbling.

Does it mean Bitcoin price will crash? Not really. Is Bitcoin dead? Doesn’t seem like it. Is this the end of cryptocurrencies? Hardly.