In finance, bubbles refer to asset-value. A bubble can be of an asset or an economy, and it’s a cyclic situation through which the market value of assets rapidly increases. Bubbles are unsustainable because commodity prices hike without improving the utilitarian value of consumer products.
Bitcoin’s value grew steadily over its first nine years of existence, despite some major day-trading volatility. It hit an all-time peak in 2017 after an aggressive, bullish streak. Throughout the last half of 2016 and the first half of 2017, investors were in a frenzy to leverage its speculative growth.
The 2017 bubble burst, but it did not grind Bitcoin’s value to zero. The crypto asset depreciated by about 80% in value. It went back up to about 88% of the 2017 peak value after three years.
Investors made fortunes by staking in Bitcoins, but some were unfortunate to buy in during bearish streaks like the 2017 Bitcoin crash. One thing that all crypto investors agree on is that the market is extremely volatile.
In 2020, a similar Bitcoin streak manifested, causing investors to debate if the market was one big bubble waiting to burst. In January, the digital currency cost $7,200, but the value ballooned to $32,700 by the end of December. However, the market conditions of 2017 and 2020 were very different.
In this article, we are establishing whether Bitcoin is an overhyped asset. Is its value inflated, or is it worth all the fuss? We are going to study interesting bits of its financial history. Ultimately, we’ll establish if it’s a safe investing haven or if you are about to lose money on an unsustainable market.
Bitcoin as the Original Cryptocurrency
On the 31st of October 2008, Satoshi Nakamoto unveiled the Bitcoin whitepaper, presenting peer-to-peer cash systems as the ultimate solution to untrustworthy central banks. At the time, the economy was on its knees due to a real-estate bubble that burst, unearthing banking malpractices.
The United States initiated a global financial crisis due to wanting, centralized fiscal policies and caused populations to interrogate financial services with extra scrutiny and discontent.
The 2008 financial crisis was a major reason for Bitcoin’s creation, and widespread adoption stems from a discount on the Fed’s ability to print dollars out of thin air. It channeled the trust needed and betrayed by banks and third-party financial services into a permissionless, peer-to-peer fashion.
The practical value of this blockchain software prevents its price from dropping to zero.
The First Major Bitcoin Bubble Burst
The 22nd of December 2017 saw a one-day, 23% depreciation of Bitcoin’s value and the start of an aggressively bearish trend. The sudden plunge was unprecedented, considering the bullish growth Bitcoin posted throughout the year.
In January, the digital asset was valued at $998, and the price bulged to $20,000 by the 21st of December.
Many pundits termed the cryptocurrency as a Ponzi scheme at worst or a speculative bubble at best. Before the crash, JPMorgan Chase tipped investors of Bitcoins tripling prices. In response, the CEO, Jamie Dimon, termed the digital assets as fraudulent, worthless tulips.
Bitcoins didn’t go bust after the 2017 crash, like the Silk Road website or Mt. Gox. It stabilized after rampant volatility and picked up a 3-year long bullish streak with some shocks. In 2020, JPMorgan Chase was actively investing in bitcoins and other cryptocurrencies.
The gradual recovery suggests some underlying utilitarian value in Bitcoin. So, why did its value slump so bad in 2017?
Well, cryptocurrencies require liquidity to foster convenient payment services. The entire crypto market relied on ICOs for liquidity, and the ICO craze caused a speculative bubble to engulf Bitcoin and other cryptos.
Fraudulent ICOs were rampant in 2017, and they caused financial regulators to crack the whip on the entire crypto community. As the SEC initiated legislative scrutiny on Bitcoin, scared investors started selling off their crypto assets.
The crash was also catapulted by Goldman Sachs, sidelining plans for a crypto trading desk. These events heightened Bitcoin’s volatility, and the blockchain was also undergoing a hard fork.
Reasons Why Bitcoin Won’t Crash Again
Investor Confidence
Bitcoin survived the 2017 crash, and many investors were adamant about training their cryptocurrencies for the long-term. In fact, the crash attracted seasoned investment experts, who rushed to buy low and are reaping big from the current bullish growth.
Regulatory Progress and Censorship Resistance
The crypto markets proved resistant to the legislative witch-hunt mounted against them. Bitcoin’s greatest threat was always government censorship, but it even survived total bans. It initially attracted users because of its censorship-resistant innovations.
In 2020, we saw regulators finding impressive middle ground with crypto communities. Investors can be confident getting into Bitcoin markets because the ecosystem is now more protective. The biggest indicator of regulatory confidence was risk-averse PayPal integrating Bitcoin payments for American users.
Covid19 Necessitated Digital Currencies
Bitcoins are limited in supply, and politicians cannot manipulate digital currencies via whimsical printing. It means that while fiat currencies keep getting diluted at mining machines, bitcoins appreciate. Digital currencies are valuable because they are pegged on demand and supply forces.
Covid19 exposed the fault of central banks printing money out of thin air to humanity. Moreover, American interest rates at banks have been minimal for years now. These issues accelerate the distrust of banks and fiat currencies.
Investors are looking to secure future relevance through digital commodities like Zoom, Amazon, Microsoft, PayPal, and Bitcoins.
Central banks are aware that cashless payments are the future, and they are developing their cryptocurrencies. While the novel CBDC assets may be considered competitors, they will affect Bitcoin’s adoption positively.
The Evolution of DeFi
DeFi propagates the peer-to-peer value exchanges, and investors can use DeFi to trade commodities, currencies, securities, and services. It relies on smart contracts, which hold monetary value within themselves for escrow purposes.
Blockchain technologies are maturing fast, and investors can now enjoy cross-chain money markets. Ethereum offers composability with numerous dApps, and innovators like Kava.io developed cross-chain interoperability.
Even though Ethereum is behind most DeFi innovations, Bitcoin is a major beneficiary because investors can now trade, lend or borrow bitcoins on decentralized exchanges.
The Halving Event
Bitcoin previously had three halving events, each happening after four years. These events always precipitated bullish trends. As bitcoins continue getting depleted, mining rewards half at every halving event.
In 2012, the mining fees halved from 50BTC to 25BTC. In 2016, the fees went down from 25BTC to 12.5BTC, and in 2020, they dropped to 6.25BTC.
Every having event reduces the supply of bitcoins. On the backdrop, demand increases as the transaction costs drop significantly. The result is often an upward trend in price mobility.
Parting Shot
It’s always embarrassing to make predictions in the crypto markets. The volatility is often too much, but some trends are not going away. While we can forgive traditional financial experts like Jamie Dimon for castigating Bitcoin, they were wrong about its worth.
Bitcoin is an avenue through which decentralized finance is possible. It’s secure, limited, cost-effective, and transparent. Other digital currencies may replicate its practical value, but it remains the first among many equals.
Do you still think that Bitcoin is a mere bubble waiting to bust in speculators’ faces? Well, we’d like to know your reasons, and you can make your predictions in the comments section.
