Experts predict that the Bitcoin bubble is nearing its bursting point and people in the financial technology world are having mixed reactions.
Earlier this month, billionaire investor Warren Buffet joined the ranks of other Wall Street influencers in calling Bitcoin a bubble. Just like JPMorgan Chase CEO Jamie Dimon, Buffet believes that the said cryptocurrency has no value at all. But, what does Bitcoin bubble really means?
“You can’t value bitcoin because it’s not a value-producing asset . . . it’s a real bubble in that sort of thing.” -Warren Buffett
Investopedia defines a bubble as:
“An economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.”
Simply put, a bubble is a rise in an asset’s price beyond its actual value due to a general belief that its price will continue to rise. If you want one good example of a bubble, just search for the DotCom bubble that occurred from 1997 to 2001.
The DotCom bubble was a period of massive growth in the adaptation of the Internet, and many internet-based companies were founded that time. However, from 2000 to 2002, the bubble exploded, leaving behind a trail of capital losses and businesses shutting down.
Some major companies today suffered a great deal of losses during the DotCom bubble period. For instance, Cisco’s stock declined by 86% as a result. Qualcomm, eBay, Amazon, and Google all lost huge market deals but were fortunate enough to recover in the following years.
Now, the question is, does the current price of Bitcoin already exceed its underlying value?
The Bitcoin Bubble: What Experts Think About it
Here’s another question that adds to the Bitcoin bubble confusion: if something only exists virtually, can it be perceived as real?
The traditional form of trading involves buying and selling of stocks, commodities like wheat and corn, and paper currencies. These things exist in the physical world. While most of them are now in electronic form, you can still physically deliver them.
Now, based on Buffet’s and other experts’ pronouncements, cryptocurrencies are not tangible investments. They argue that it’s impossible to put value in an alleged asset if it has no intrinsic or book value. To these figures, Bitcoin owners buy coins because they are betting that its value will surge–not to use the currency to invest in a project.
In essence, we can all speculate on traditional investments like precious metals and stocks. However, we can’t just assume Bitcoin to be anything or something. At one point, Paypal Co-Founder Peter Thiel referred to Bitcoin as something akin to gold.
“I’m skeptical of most of them (cryptocurrencies), I do think people are a little bit . . . underestimating bitcoin especially because . . . it’s like a reserve form of money, it’s like gold, and it’s just a store of value. You don’t need to use it to make payments,” Thiel was quoted as saying.
Again, implying that Bitcoin is like gold is unacceptable to many conventional investors since gold is a tangible asset while cryptocurrency is not. In that sense, a better definition of how to value a virtual denomination of wealth must be put in place.
However, Wall Street’s ‘dean of valuation,’ Aswath Damodaran argued that Bitcoin is classified as a currency. Therefore, there’s no valuation discussion around it. In an article he published on his website, Damodaran wrote:
“Bitcoin is not an asset, since it does not generate cash flows standing alone for those who hold it (until you sell it). It is not a commodity, because it is not raw material that can be used in the production of something useful.”
The Bitcoin Bubble: Will it Burst?
There is no denying that Bitcoin and other cryptocurrencies are getting all the hype today. The continuing rise in its value attracts the attention of people who are primarily interested in getting rich quick. This, in turn, strengthens the belief of experts about the Bitcoin bubble.
The rising demand for Bitcoin and other cryptocurrencies is evident in the sudden rise of initial coin offerings these past years. ICOs gave companies, especially startups, the opportunity to expand and gain investments without the need for a formal stock market listing.
If you want to learn more about ICOs, read this article.
While ICO investors only get tokens or electronic coins in exchange for their monetary investments, the rapid increase of a virtual coin value is feeding the enthusiasm of people. As said earlier, people are buying coins not to use it in their everyday lives. They are keeping it in hopes that its price will surge in order to dump it for a huge return later. As what Bluford Putnam and Erik Norland of CME said:
“Wouldn’t you have regretted paying 20 Bitcoins for a $40,000 car in June 2017 only to see the same 20 Bitcoins valued at nearly $100,000 by October of the same year?”
Aside from price, other factors that attract people to Bitcoin, and seemingly inflates the Bitcoin bubble, include the anonymity it provides to its users and the lack of centralized control over it.
However, the anonymity that Bitcoin and other cryptocurrencies provide attracts not just the attention of ordinary investors, but of criminals as well. The advent of cryptocurrency gave organized criminal groups an effective way of conducting their illegal transactions without being traced by authorities. In fact, Bitcoin is considered as the primary currency of the Dark Web where all sorts of contraband are sold.
In an interview with Business Insider, famous economist Nouriel Roubini who called the Bitcoin price gain a gigantic speculative bubble, said:
“What’s more – it is also used by criminals, for their shady business. I think that more and more countries will start to make cryptocurrency exchanges illegal like China did. New regulations will be adopted. So, this will find its end.”
This brings us back to Buffet’s primary concern:
“It doesn’t make sense. This thing is not regulated. It’s not under control. It’s not under the supervision [of] any…United States Federal Reserve or any other central bank. I don’t believe in this whole thing at all. I think it’s going to implode.”
Governments are now putting regulatory pressure on ICOs and cryptocurrencies. While majority of countries are not banning Bitcoin, some have put strict regulations and warnings about its usage.
For instance, the Icelandic Foreign Exchange Act prohibits the Central Bank of Iceland from engaging in foreign exchange trading with the “electronic currency Bitcoin.” Bangladesh, Nepal, Kyrgyzstan, Ecuador, and Bolivia are some of the countries who banned Bitcoin and other cryptocurrencies.
China has banned ICOs.
Harvard economist Kenneth Rogoff believes that this regulatory pressure would eventually lead to the collapse of the Bitcoin bubble. In an article he wrote for The Guardian, Rogoff said:
“My best guess is that in the long run, the technology will thrive, but that the price of bitcoin will collapse.”
Experts deemed that the current boom in the value of Bitcoin puts the said cryptocurrency in a stage where swindles frequently happen. While this is not considered as a primary factor that could burst the bubble, it could eventually lead to panic selling of coins – a scenario that could result in a plunge in Bitcoin’s price.
Economist Bill Cornerly explained in an article he wrote for Forbes:
“In most cases, the cycle stops here with that one asset. Sometimes, however, there are wider impacts. Heavily leveraged firms that were lending to the bubble sector start to fail. They may include banks, brokerages, and traders. They try to meet their obligations by selling other assets, which causes other prices to fall, accentuating the downturn. This can turn into a vicious cycle.”
Joe Pindar, the Director of Product Strategy at Gemalto, a digital security firm, also thinks that the cryptocurrency (not just Bitcoin) is a ticking time bomb. He told Express.Co.Uk:
“With so many new cryptocurrencies being launched on almost a daily basis, there is no doubt that the cryptocurrency bubble is going to burst. But like all bubbles calling the exact time it will go pop is extremely hard. It reminds me a lot of the DotCom bubble in 1999, which companies like Amazon and Google survived and became essential to our daily lives.
Similarly the convenience and international nature of cryptocurrencies provide so many benefits, once the hype has been removed, we will be left with the serious players, and the true value will be established. My advice is not to jump in head first, but don’t expect cryptocurrencies just to be an overnight sensation.”
CEO of French banking giant Société Générale, Severin Cabannes, also believes in the Bitcoin bubble and directly told Bloomberg that they are interested in the blockchain technology and not Bitcoin per se. He was quoted as saying:
“We are very interested not in bitcoin, but in blockchain, and the underlying technology. It is fair to say that today bitcoin is, in my view, clearly in a bubble – very clearly. But we don’t know very well what are the market drivers behind this price evolution. We are not very keen to invest in bitcoin. But we are very keen to invest in the blockchain technology.”
As a final note, what we featured here are some of the opinions of influential investors, economists, and Wall Street personalities regarding the Bitcoin bubble. If we are going to look at falling asset prices as a determiner, one must remember that assets could still suffer decline in prices even if it was not in a bubble.
At this stage, no one knows for certain if Bitcoin is indeed a bubble or if it is, when would it pop.