The Bitcoin Boom: Is It the Future of Finance, or Just a Bubble?
With Bitcoin’s market cap now above $163 billion USD people have started wondering where the cryptocurrency will end up in a few years. Is it all just a bubble, will the government regulate it to death, or will it continue soaring?
New Capital Enters the Market
At press time, the bitcoin price has blasted through the over-hyped and symbolic milestone of $10,000, even going as high as $11,000. And while the markets have since entered a brief correction, hitting that milestone is still a big deal.
The influx of capital from institutional investors seems to be a major driver of this recent bitcoin price rally. For example, the CME Group, CBOE, and Nasdaq have all announced within one month that they would offer bitcoin-based futures contracts starting in 2018.
In order to better understand the impact of government-regulated Bitcoin Futures will have on the global crypto-currency market, it is important to acknowledge that it is quite difficult for everyday traders and casual investors to invest in bitcoin due to strict regulations imposed by governments.
However, institutional investors entering the bitcoin market also means more attention from governments, who will expect these big investors to follow standing financial regulations — even if bitcoin doesn’t exactly fall under current regulations.
If these big traders comply, however, we can expect huge amounts of new money to flood the market, pushing the bitcoin price even higher.
But Might It Be a Bubble?
The latest spike in price has left the market watchers increasingly worried that bitcoin is a bubble ready to burst. Lately, more get excited about getting rich from bitcoin rather than from the Bitcoin technology and its potential to change the world as a digital money. To many, bitcoin is merely a stock that seems to appreciate infinitely, and they want in before it goes any higher. And so the bubble continues to grow.
Therefore, investors should start acknowledging the possibility that bitcoin can and will become overvalued from speculative behavior.
And yet, despite the disconnection between the increased market cap and the stationary number of daily transactions, influential people in the financial world continue to declare that bitcoin will rise to $100,000 soon — or higher. While that’s possible, these people only fuel the bubble if bitcoin has in fact become overvalued.
In response to the rapid bitcoin price rally, novice traders have flocked into the market with the sole purpose of making a quick profit.
To get an idea of the influx of new traders, consider the recent report from Coinbase that it added approximately 100k new trading accounts over the Thanksgiving holiday, adding to their 13 million strong user base.
This herd-like mentality displayed by many investors in this market has allowed for crazy volatility, which certainly benefits traders. However, it doesn’t necessarily mean that the technology itself has gained popularity. And it certainly doesn’t mean that the bitcoin price will continue to rise forever.
Is Bitcoin a Bubble? It’s Really too Early to Tell
While many people refer to the dot-com bubble as evidence that Bitcoin will follow suit, there are some important distinctions to be made. A good place to start is the size differential between the size of crypto market now and the size of tech market back in 2000.
By early 2000, reality started to sink in. Investors soon realized that the dot-com dream had devolved into a classic speculative bubble.
Companies such as Pets.com had lost $147 million in the first nine months, and were unable to secure more cash from investors.When Pets.com went public in February 2000, its stock started at $11 a share and rose to a high of $14. But the rally was short lived and Pets.com’s stock quickly fell below $1 and stayed there until its demise.
While there is much “irrational exuberance” in the crypto market, there are also many merits to the technology and values in the services that it provides, unlike many of the dotcom websites.
Blockchain technology has great potential to shape our future and lead the way to a more decentralized world, where people have the power in their own hands and not in a 3rd party.
Bitcoin still has plenty of room to grow, too, as people will continue to invest over excitement for potential for $20,000 BTC in the near future.
But no one knows what’s going to happen next. Bitcoin could be different; maybe not. Only time will tell.
Where do you stand? Is Bitcoin not going to turn out like a traditional speculative bubble after all? Sound off below!
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