Bitcoin is an evergreen cryptocurrency with the largest market capitalization and asset value. It manages to do this because of its deflationary nature and store-of-value. Compared to fiat currency, the finite supply of Bitcoin gives consumers more buying power and allows them to hedge against inflation. Apart from that, Bitcoin has gained the interest of investors because of its decentralized design, blockchain technology, no legal obligations, and anonymity and security of transactions.
Bitcoin’s greatest advantage is its liquidity that lets investors buy or sell their digital currency quickly at any point in time. But this makes Bitcoin extremely volatile, which means investors would observe price swings at any moment. The Bitcoin Bubble is the result of such phenomena that intrigues both investors and market analysts. While some see it in a positive light as something to be benefitted from, others believe it to be a warning sign for the inevitable crash of Bitcoin prices.
Two factors that may be behind the bitcoin bubble are momentum and the attention that people pay to it.
What Does the “Bubble” Mean?
Bitcoin is a volatile asset and speculates on price movements to gain value. In all probabilities, its value tends to go upwards or downwards. A Bubble is a situation when Bitcoin prices touch new heights after being stagnant for a long time. But as seen in the past, Bitcoin tends to fall at a drastic pace after witnessing the Bubble. This state is called the Bitcoin Bubble Burst.
Any momentary price rise or immediate price decline would not define this state. However, it is never easy to predict or describe a burst until the price drop is significant.
The Bitcoin Bubble & The Cause Of Bubble
Bitcoin enthusiasts present many arguments to describe a Bitcoin Bubble or what causes it. A Bubble consists of three stages – the first showing early signs of a Bubble, the second when it takes the shape of a Bubble, and the third when the Bubble bursts. Money that isn’t backed by a commodity like gold or silver is a bubble.
- The Bubble usually begins with slight price fluctuations that mostly remain on the low side. And then, despite crossing its previous highest price, investors do not find Bitcoin enticing enough to invest.
- When the price shifts from mostly being low to surpassing its fundamental value rapidly and achieving stability, it is known to have created a Bubble. It happens when Bitcoin witnesses a sudden increase in demand and a flurry of investments that push its price further.
- The Bubble leads to a situation where investors start selling Bitcoins in the hope of making most of the price rise or out of the fear of a price crash. This panic-driven buying-selling cycle culminates in the Burst of the Bubble.
Factors that could cause a Bubble might range from a financial crisis to the growing popularity of Bitcoin as an alternative, profitable, and decentralized currency. With that said, some investors or analysts do not agree on the rationale that the Bitcoin Bubble is real. Instead, to support their case, they invoke past Bitcoin price patterns, whereby price increase and decline occurred at a similar pace on most occasions.
They propose that Bitcoin price had never touched the zero mark in its history after achieving a humongous growth. A Burst makes it virtually difficult for the commodity to restore its worth in the case of a financial bubble. Based on this fact-based logic, they refute the concept of the Bitcoin Bubble.
Will There Be A Bitcoin Bubble?
Bitcoin reported its first Bubble in 2011, followed by the years 2013, 2017, and 2020. Bitcoin prices nearly doubled to $40,000 at the beginning of the second week of January 2021, after climbing to $20,000 in December 2017. Currently, there is a mixed reaction from the crypto market given the history of the Bitcoin Bubble Burst.
But what if the suspicion has no substance and the Bubble does not burst but softens. Things with Bitcoin have changed quite a lot in the last three years. Even though predicting a Bubble could be risky, a few factors can stop history from repeating itself.
- Institutional Adoption
Compared to 2017, institutional investors are not just showing interest in Bitcoin, but they are also investing in it.
- Safe Haven Asset
Investors are using Bitcoin as a hedging tool against inflation caused by COVID-19 or global economic instability and investing in this safe-haven asset.
- Digital Currencies
Many governments, corporates, and banks are exploring digital currencies due to the rise in cashless payments, making Bitcoin a stronger candidate for the purpose.
- Technological Innovation
The evolution of decentralized finance coupled with blockchain technology will help create decentralized derivatives trading and exchanges.
Final Thoughts
A Bitcoin Bubble happens when new investors enter the market, and the supply decreases over time. The ideal way to tell if there is a Bitcoin Bubble is if it Bursts soon after the price surge due to less usability. Bitcoin is risky, as we have already said, and only time can tell if there is going to be a Bitcoin Bubble. As CitiGroup analysts said in a note to investors, “Bitcoin’s future is thus still uncertain, but developments in the near term are likely to prove decisive as the currency balances at the tipping point of mainstream acceptance or a speculative implosion,”Still, many believe that Bitcoin isn’t just a bubble anymore. It’s a part of the global economy. Make investment or trade with the Bitcoin circuit to make a good amount of profit. It is an automated trading system which mainly focuses on making profit from Bitcoin. Read out Bitcoin Circuit Reviews to know further more about it.
