The phenomenon of Bitcoin loses integers before the media attention. Less than a year ago, its price was in the center of all eyes. Now, however, Bitcoin is going as unnoticed as its downtrend . A question that, in these times, could make sense could be: Is Bitcoin a bubble or a reality?
The success of Bitcoin has been undoubted. Another very different thing is that the success has been ephemeral or is maintained over time. That, let’s face it, nobody knows. We cannot know if the success achieved so far by Satoshi Nakamoto’s coin will continue, grow or end up evaporating.
Whatever our opinion of Bitcoin, in the end it is still just that. Of course, among the opinions, there are some more credible than others. Most of the people who think about Bitcoin, let’s face it, have no idea even how the currency market works . While the minority in the know, in some cases, have a biased opinion of what they would like it to be.
To illustrate the latter, let’s take an example. Let’s imagine that I am a computer engineer and I like Bitcoin. It really seems like a brilliant idea to me. I would love for it to prosper. With that said, I will do my best to convince others and myself that it is the future. It is a human defect. We usually see what we want to see. This is why most investors lose their money in the stock market .
Before continuing, I would like to give some good news: to understand why many things happen in economics, you don’t need to know so much. Sometimes a few basic concepts illustrate much more than complex mathematical models full of variables that no one understands.
Is Bitcoin a bubble?
From a theoretical point of view we cannot affirm that Bitcoin is a bubble. If we look at the definition that we have in our economic dictionary of ‘ economic bubble ‘, we have to:
«… there is an excessive and uncontrolled increase in the price of a good, this amount being substantially separated from its theoretical value.»
By not entering into the conceptual discussion of whether or not money is a good, we will stick exclusively to the term ‘theoretical value’ . In practice, it is wrong to extrapolate the theoretical or intrinsic value analysis framework to a currency. Why? We can think of it in the following way:
We want to calculate the theoretical value of a company. That is, calculate what its real value is. In this first point, we differentiate price and value. The price is what it costs to acquire the company at market price. Meanwhile, the price or theoretical value is what indicates how much it should be worth if it were fairly valued.
Thus, to calculate the theoretical value of a company we could think of estimating how much it will earn in the future, what is the value of the factories it has, how much debt it has. However, in the case of a currency there are no cash flows, no factories, no debt, nothing. So what does the price of a coin depend on?
The price of a currency ultimately depends on its demand (and supply). If people demand a currency, the currency will appreciate. Whereas if nobody wants that coin, the coin will lose value until it disappears. Why is this happening? It happens because money is based on trust. Hence it is called fiat money. A word that comes from the Latin ‘fiducia’ and which means trust.
Bitcoin evolution graph
Source: Yahoo Finance
The previous graph shows us the evolution of the last two years of Bitcoin. The changes in prices have been extreme. No one can deny it. Thus, although from the theoretical point of view we cannot affirm that it is an economic bubble, if we ignore the conceptual part we can see some similarity with other bubbles. In Economipedia we have several examples:
- South Seas Bubble
- Tulip crisis
- Dot-com bubble
- Railroad fever
The above represent very few examples compared to the total number of bubbles that exist. In any case, most of them have many elements in common that we gather in a brilliant article by Alfonso Peiró:
Analysis of economic bubbles
Fortunately for some and unfortunately for others, Bitcoin has many elements in common. We will have to wait and only time will dictate judgment. In the markets, anything is possible. From its final collapse to a break of all-time highs in the future. That is why we always talk about probabilities.
The future of Bitcoin
Bitcoin is a part of our present. Existing exists and, therefore, is an undoubted part of our economic reality. Ideally, theoretically, Bitcoin would prosper. What better than a free and safe currency?
History has shown us that anything that involves controlling the printing of money, whether through printing or through measures to reduce the money supply, has resulted in deeper business cycles.
Virtual currencies will most likely continue to develop in the future. However, that does not mean that its price necessarily rises or necessarily falls. They must have the confidence of a large volume of transactions to be less prone to movements of such depth.
For this to happen, there must be a situation that, in the short term, seems unlikely: that governments allow these currencies to prosper by offering an adequate regulatory framework or that, at the very least, they do not trip up progress. If governments do not support or allow their entry, virtual currencies will remain that, a project.