The Bitcoin Bubble Burst
As 2021 approaches an end, the world eagerly awaits the fate of the most popular cryptocurrency: Bitcoin. Bitcoin has been leading the surge in cryptocurrency investments for years, with a current price of ~63K per coin. The difference between Bitcoin and the second-highest coin, Ethereum is ginormous with a near 60k difference as Ethereum is trading for ~4k. For months investors have claimed the bitcoin bubble will pop soon but what exactly is this bubble and what could it mean for the coin?
Bitcoin is a cryptocurrency created in 2009 by an unknown person under the alias Satoshi Nakamoto. The popularity of bitcoin and cryptocurrency, in general, is largely due to the nature of the online currency, having no middlemen between transactions, and being able to buy purchases anonymously. Imagine if we could all store and exchange money without any banks, receipts, or credit card fees, well that’s exactly what bitcoin and cryptos are made for! Bitcoins can be bought on any Bitcoin exchange marketplace from sellers and stored in online “wallets.” These wallets are digital and use specific wallet IDs and identifications to store bitcoin anonymously.
What is a bubble?
A bubble occurs when any asset that is being traded, including stocks, cryptos, and real estate gains an accelerated surge in prices without it being due to any logical or fundamental reason. In simple terms, the price of the asset is severely overvalued, meaning it is far too expensive for the perceived value of the asset. Bubbles can have a wide variety of origins, but the most common is irrational groupthink. For example, GME, a “meme stock” was considered a bubble in 2020 when it shot up to a price of $320 USD. This surge in price was purely illogical from a financial perspective. GameStop was losing revenue in all quarters and performing severely poorly amidst the Covid-19 pandemic. Despite this, the price of their stock went to the moon from investors. Remember, the price of the asset must accelerate at a pace not reflective of their fundamental value and for no intrinsic reason.
Although there is no definitive fact whether bitcoin is a bubble or not, as in there is not a definitive way to suggest that bitcoin isn’t worth the staggering 63k per coin, a survey conducted by the Bank of America found that 74% of investors believe Bitcoin is a bubble. Bitcoin’s price has risen nine-fold this past year alone and is still at an all-time peak.
What happens if the bubble bursts?
There is no way to know for sure, but many investors have theorized the effects. Ari Paul, chief investment officer at BlockTower Capital expects that there would be “no meaningful impact.” Currently, the majority of bitcoin is held by a small number of very wealthy firms and individuals, it might be the case that those are impacted most, with personal investors having little effect. The bubble bursting will likely also reduce the value of bitcoin- if only temporarily at least. Investors who scramble to sell their coins as the price decreases can cause other investors to do the same until it eventually reduces to a slump in bitcoin price. The bubble popping could also decrease the prices of all other currencies as blockchain miners panic sell other cryptos.
Beyond the Bubble
Although many theorize on the bubble bursting, remember, everything about this is speculative. No one knows if or when the bubble will burst if it even will, nor does anyone know of the long-term effects should it happen. Maybe nothing will happen, or maybe the bubble will start a nuclear WW3. That’s not to say it can, but I’m simply highlighting the uncertainty of bitcoin. The only thing we can do is wait and see.
Written by: Jason Jin| IQ Associate
