Bitcoin Has All the Signs of a Speculative Bubble

Bitcoin is no longer the stuff of computer geeks in the crazy 60s and 70s. This cryptocurrency now appears in daily newspapers, on TV, on the radio, in cabs, and in music. And even churches receive Bitcoin donations.

Since 2009, the evolution of the Bitcoin price shows all the classic signs of a speculative bubble. And everyone knows this, but crypto-enthusiasts don’t want to admit it.

The enthusiasts bring up all kinds of reasons why the development this time is unique and cannot be compared with previous classic speculative bubbles.

Moreover, Bitcoin is not a new asset class. Because there is no evidence that cryptocurrencies offer any real protection against inflation.

Speculative bubbles always follow the same chart

And they always end in a crash. Like a fast-moving car.

The current excitement and euphoria surrounding Bitcoin show all the classic signs of a speculative bubble. So let’s take a closer look at this story.

As I write this from a coffee shop, one Bitcoin costs just over $21,000. The value of all Bitcoin in circulation comes to $407 billion. But a price development of that size by itself is not a sign of a bubble.

What is important is the history that always repeats itself and gets stuck in investors’ minds. And this is where things get sweeter.

Bubbles develop in phases.

Phase 1 is the beginning of everything.

Any discovery, a political decision, or invention of new technology makes room for a new story.

A few excited and courageous pioneers take notice of the new thing and invest. This is where the public is not yet aware of it. Or if they do, they are ignoring it.

A typical example was the advent of the Internet in the 1990s. And the invention of the steam train in the early 19th century. Nobody uses steam trains anymore.

With Bitcoin, the change occurred in 2009 when Satoshi Nakamoto first put the Blockchain technology to work.

After that comes phase 2. When the lights come on.

This is where the new thing becomes a trend. A small audience begins to recognize that the “new thing” can change the world.

Money starts to flow into the system on a large scale, and prices rise, which in turn attracts media attention, curious people, and more investors to join the story.

The Internet bubble started in 1998 when companies like Amazon and Netscape went public on the stock exchanges.

With Bitcoin, it started in 2015 when its price was still rising at a slow pace. This is where media reports and some conferences about cryptocurrencies and blockchain grabbed headlines. Here they say that they are not just toys for computer geeks, but will change the world.

Then comes phase 3.

The euphoria.

Now that a lot of money is flowing into the community, prices are going through the roof.

Those who previously threw stones at the new thing are afraid of missing out on something really big. FOMO sets in.

Then there are stories of people who got rich from the “new thing”.

That’s all the mainstream media talk about. Everything is different this time. As an investor, you simply need to get on the bandwagon. If not now, then you have lost. You are a latecomer. You are a failure.

Many investors go into debt at this stage in order to buy even more.

With the Internet bubble, the euphoria phase occurred at the turn of the millennium (in 2000), when speculation was rife on the stock exchanges that “dotcom companies” would revolutionize everything that had gone before.

With Bitcoin, it is so easy to see that we are in the euphoria phase.

Here they say that Bitcoin’s maximum supply is limited to 21 million coins. While confidence in the dominant fiat currencies (euro and dollar) declines.

The euphoria is great for everyone who has invested.

At some point, the tide turns. And phase 4 starts to kick in.

Prices no longer rise. Investors and speculators start to get nervous and there is a desire and desperation among investors to make profits.

Demand falls and prices plummet from the moon to the floor.

In 1929, just before the Great Crash, the mood on Wall Street in New York changed for no apparent reason.

With Bitcoin, that phase has not yet begun.

Then comes phase 5, which is the total blackout.

Where all the secrets come out. Fraudsters are exposed, and many companies declare total bankruptcy.

This is also the phase where the most skeptical or courageous investors have the best buying opportunities because almost no one cares anymore.

The Bitcoin price bubble that no enthusiast wants to admit

The Bitcoin price chart shows all the signs of a bubble. But that doesn’t mean the bubble will burst anytime soon.

The price can still go from the current $21,000 to its highest level it has ever been, $69,000. Or $100,000. Or even $1,000,000 as they say on Twitter.

But it could also break to $4,000. That has already happened. In 2017 when Bitcoin went from $20,000 to $4,000.

When you can talk about a price bubble in the financial markets a price movement by itself is not a sign of a bubble.

The simplest definition of a price bubble in an asset is when the price becomes disconnected from the fair or intrinsic value of the asset in question. That is, the price skyrockets without the intrinsic value also increasing.

So, what is the fair value of Bitcoin?

Very simple.

Bitcoin has no fair value

A fair value can be determined for gold, stock, currency, or any asset that an investor can buy in the financial markets.

The fair value of a stock is its book value of any dividends that will be paid in the future.

Yes, you will tell me that not all stocks pay dividends. You are right.

While this method of calculation is not 100% practical, and the price of a stock on the stock market can drop by 90%, fair value is just one metric that investors can use as a guide to get north of how the stock market moves through history.

As Warren Buffet says, Bitcoin does not distribute cash flow in the form of dividends.

And unlike bonds, cryptocurrencies have no interest and no redemption date.

So again, Bitcoin has no fair value.

The only factor that determines the value of Bitcoin is the price the next buyer is willing to pay for it. Simple as that. Just like NFTs.

All we have learned from previous bubbles is that they all ended badly.