Is The Bitcoin Bubble Bursting?

15th January, 2018 by

The world’s leading cryptocurrency experienced unprecedented growing pains last year. From August’s Bitcoin Cash fork to December’s astonishing price fluctuations, Bitcoin was rarely out of the headlines.

While the getting is good…

Unfortunately, when investment opportunities become headline news, everyone piles in and the original business model goes out of the window. One Bitcoin was worth just under $1,000 on January 1st 2017, soaring to $10,000 on December 1st. It briefly hit a high of almost $20,000 in mid-December, yet it ended 2017 worth less than $14,000. Experts queued up to say the future of Bitcoin looked bleak, blaming its volatility on investor ignorance while comparing it unfavourably with newer cryptocurrencies like the equally volatile Ripple.

In response, some companies refused to accept Bitcoin payments without transaction values being guaranteed against traditional currencies like the dollar. There have even been warnings that certain investment opportunities resemble pyramid schemes, which will collapse whenever the current flood of investors slows to a trickle. Yet anyone who bought a Bitcoin twelve months ago will feel pretty happy if they decide to sell tomorrow. And that raises a valid question about whether the future of Bitcoin resembles an uncontrolled bubble or the evolution of finance.

Too good to be true?

In truth, both scenarios could occur simultaneously. December’s astronomical rate of appreciation is clearly unsustainable in the long term, particularly as it’s hard to actually spend Bitcoin anywhere. Without being pegged to a physical product or service, it’s only worth what the market decides to value it at. There’s no other way of gauging Bitcoin’s worth, because it doesn’t have an underwriting authority. We don’t even know for sure who invented it, or why.

If you think of Bitcoin as a currency, investing in it today would be highly irresponsible. Very few companies accept it as a method of payment, and values fluctuate by as much as 20% in a day compared to Sterling. Even IT companies (often assumed to be a sympathetic audience) prefer payments in rival cryptocurrency Ethereum.

A new perspective

Instead, it’s better to view Bitcoin as an asset. In December, futures contracts were launched on the CME exchange, signalling another stage in Bitcoin’s ongoing transition from a cryptocurrency to a tradable commodity, akin to gilts or futures. If and when the widely predicted crash in value occurs, those hardest hit will be speculators who bought too late. Everyone else will still be able to use Bitcoin and satoshi (worth 0.00000001 Bitcoin), but at a less favourable rate.

Most observers believe the future of Bitcoin effectively resembles its past – as a promising upstart rival to traditional payment methods. After all, Bitcoin remains an exchange rate-free currency that can be transferred instantly and anonymously. Those advantages look every bit as compelling as they did when Bitcoin was created nine years ago – arguably more so, given recent press stories about stolen customer databases and online fraud committed against real-world financial institutions.

If Bitcoin can avoid any more scandals involving online wallets being hacked (which occurred with depressing regularity in 2017), consumers might feel confident enough to swap sterling or dollars for this emerging cryptocurrency. Otherwise, the future of Bitcoin will probably be as an investment vehicle, rather than a payment platform.

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