What is the Bitcoin Bubble?
Bitcoin is a free software and a peer-to-peer system where each member holds a specific number of numerical items. On account of some cryptographic calculations, the system guarantees that a given numerical object has only a single owner. Members are obviously allowed to exchange those items, called bitcoins, among themselves. A speculation driven increase in the value of these Bitcoins beyond its real value is the creation of the Bitcoin Bubble.
Without the requirement for a regulatory authority, bitcoins are in restricted amount and can't be fake. As soon as someone agrees to sell using bitcoin as a currency, it starts gaining value.That is exactly what is happening right now where bitcoins are being used extensively for illegal transactions. It is also used for making payments for illegal objects on the web.
Reckoning this pattern, a few people are purchasing bitcoins now imagining that bitcoin value will go up later on. As there's a ton of interest to purchase bitcoin, the valuation of bitcoin rises exponentially. The rule that we are talking about here, it's called speculation.
In under 10 months, the bitcoin rose past $16,000 this year. Yet, what amount of this valuation is because of the market and what amount is because of speculation? What will occur later on? It is very important to ask these very significant questions. A big crunch might also be one of the outcomes of the Bitcoin bubble that would be caused due to the hype.
What might cause the Bitcoin Bubble to burst?
Similar to every speculative bubble, the bubble keeps on inflating and inflating. This goes on till someone is awoken and that person questions himself" What am I doing? I've spent all I have on mathematical programs. I need to sell them quickly". As people start stelling, the price of the Bitcoin starts crashing. Witnessing the selling spree all around, the people with the largest shares panic. Even they start selling off their cryptocurrency assets and the price of Bitcoin goes down faster than it went up. This would be a classic repetition of the .com bubble. In that, people paid for start-ups which did not even have a business model of their own.
What does it mean for investors?
Most of the investors have a very mixed view towards the rising value of Bitcoin. Some belong to a bullish school of thought. On the other hand, others believe that this would be the biggest bubble of our time and that the valuation of Bitcoin will go beyond our control.
Analyst Taraq Alwahedi, said that the bases of Bitcoin are still very strong. It has a lot of potential in the blockchain technology combined with its ease of worldwide execution and decentralized nature. He also added that the speculation and hype driven price is the reason this might face a huge crunch in the future. It has been added that if people do not focus on the fundamentals and just follow the trend then a bubble burst is imminent in the near future.
What happens if Bitcoin crashes?
Bitcoin is insanely unstable, with twofold digit drops being normal. In June, for example, it fell 19 percent in one day. Furthermore, a considerable lot of the general population heaping into bitcoin have all the signs of being speculators, not long term investors who have faith in its future. While the computerized currency has discovered expanding acknowledgment among a few retailers, like Expedia acknowledging it and considering it as currency for transactions. Bitcoin and its younger adversaries like Ethereum have far to go.
Multiple sources mentioned that the bitcoin bubble if it crashes, would not affect much of the capitalist economy because no matter the popularity it has gained its reach is however small and limited.
Another reason for the bitcoin bubble not harming any economy is because that most of its stakeholders are wealthy people who bought this cryptocurrency at dirt cheap prices in the start and their valuation increased with every passing day making them millionaires, Silicon Valley hotshots and people who run extensive cryptocurrency mining operations.
The bubble burst won't affect the economies because its capital value is also minuscule when compared to the US and World GDPs comprising 3.2% and 0.8% respectively. Also, it is not leverage that fuels the bitcoin bubble. A bubble generated due to borrowed money has the capability of impacting the economy in a worse way, for example, the Housing Bubble. Unlike the housing bubble, it is not being something that is completely dependent on borrowing of money from the economy. The bitcoin bubble crash will have minimal damage to the economy and non-cryptocurrency investors. However, the people who invested large amounts in this will face a huge loss.