Boom or Bust?! The Bitcoin Bubble
The meteoric rise of Bitcoin is hard to Ignore. Especially since the latest announcement about Tesla’s massive $1.5bn investment in the cryptocurrency. According to this bitcoin reached a new record-breaking high of almost $48000. Everybody is now wondering the same thing: “Should we also invest in bitcoin or not?”.
Why should you?
It is important to understand what bitcoin is to comprehend why it’s such a popular investment. Bitcoin is essentially a piece of software. It allows users to trade digital ‘coins’ which’s worth is determined by how much someone is willing to pay for them. The idea behind it was that users would be able to create a ‘peer-to-peer electronic cash system’.
This would be free of middlemen such as banks – it is no coincidence bitcoin sprung up in the depths of the financial crisis when confidence in big banks was at its lowest. With the tumbling dollar and reducing confidence levels in the Central bank, many believe that bitcoin is the future for financial transactions, this is becoming even more apparent in the pandemic. It is open to anyone who owns a smart device, with no restrictions on its use, and much more transparent and secure than corporate banks making it very appealing for the common public who normally finally get the chance to manage their wealth.
With such upside naturally, the demand for Bitcoin has reached the point it has today. Unlike 2017 when the hype was driven by fundamentally individual investors today the momentum for bitcoin is being driven by large institutions and groups of professional and amateur investors. It is being legalized in a sense. Popular Fin-tech companies like Paypal, Robinhood, Square are now allowing purchases and exchanges of the cryptocurrency. The biggest asset management firm in the world: Black Rock has allocated funds for Bitcoin. Now that Tesla has broken the Ice, it’s only a matter of time until we see other major corporations investing in bitcoin.
With the growing demand on an individual and institutional level bitcoin is expected to grow even further in the future with predictions as high as a million dollars.
Another reason for its rise is because in concept unlike a regular currency like the pound, bitcoin isn’t infinite. The Bank of England can always ask the money printers to create more banknotes, if it sees fit, or create a similar effect through its bond-buying programme, however for bitcoin there is a limit, due to way it was created only 21 million of it can be mined out which 18.6 million has already been mined, this scarcity is another reason why in theory the value of bitcoin should never decrease.
Why should you not?
Technically, bitcoin’s fundamental value is zero, or even negative zero if a carbon tax is applied to its massive polluting energy-hogging production. Did you know according to Cambridge University Bitcoin consumes more electricity than the whole of Argentina? Just because it’s not paper-based doesn’t mean it’s environmentally friendly.
The reason its intrinsic value is zero is that bitcoin is a non-productive asset, hence investing in it doesn’t mean you are investing in an assets potential to generate revenue, rather you are investing in what people believe its value is or could be.
Now isn’t gold a non-productive asset as well? The issue with that comparison is that gold’s market cap is north of $12 trn whereas bitcoin’s is only $420 bn. The problem this poses is that bitcoin’s market is small enough to be significantly impacted by large enough individual investments, an example being Teslas’ $1.5bn dollar investment. This causes the price of bitcoin and cryptocurrencies to be extremely volatile and risky. The current investment surge was primarily triggered by rookie investors who don’t necessarily understand the market accurately. In the 2017-2018 crash bitcoin went from $1000 to $20000 and down to $3000 all in a span of a little more than a year.
The praises for its decentralized system and potential to become the framework of our financial institution aren’t all that genuine in reality. Firstly, bitcoin is the perfect Ponzi money laundering scheme. Since anybody can buy with no regulation at all, it is very easy to buy bitcoin with black money, and because of how decentralized the system is it is almost impossible to know if a transaction is through legitimate money or not. Secondly, there isn’t enough bitcoin to make it available to everyone. With only 21 million available, everyone can’t have bitcoin. It is a supply shortage issue. In the future when demand for bitcoins grows, and supply decreases, a situation similar to the oil industry could occur, where major bitcoin mining companies monopolize on the value of bitcoin using the supply shortage. Leading to ripples across the global market when it all comes crashing down.
What to do?
In totality, it is all simply a big risk, because no one can say for certain, what is going to happen. In the short run due to the momentum bitcoin has, prices may keep increasing even further, however in the long run, there are just too many uncertainties and potential risks to go full-in on bitcoin.
