Despite what fans and cryptocurrency investors would have you believe, economists say the Bitcoin craze could be a bubble.
Since Bitcoin’s legendary surge to more than $19,000 USD per Bitcoin last Christmas, top economists can’t seem to make up their minds. Cryptocurrency such as Ether, Litecoin, and others operate as ICOs without regulations. This power of FinTech to democratize monetary power is the essence of cryptocurrency.
But what do top economists say about cryptocurrency’s brevity or longevity on the market?#Cryptocurrency: Economists Weigh in on Bubble or Breakthrough StatusClick To Tweet
Democratized Trading or Investment Scheme?
The beauty of technology, especially as it applies to finance, it the democratizing power of it. Instead of investing in a desktop PC, you can do almost everything from your smartphone. As follows with finance, you no longer need to be an old-school market trader.
FinTech and cryptocurrency have put the trading power in the hands of whoever invests.
Of course, the volatility of the market is enough to scare away traditional investors and newbies alike. The adage “Buy low, sell high” applies to Bitcoin and the like, but on a much more fragile timetable.
As such, many economists see this FinTech wonder as another fly-by-night, flash in the pan craze ending in a bubble burst. This could lead to detrimental economic effects. Could the effects be as severe as the 2008 crash? Probably not. But let’s see what the buzz is around the Bitcoin bubble.
Argument: Cryptocurrency is the Future of Trading & Investment
As early as April of 2013, various economists’ radars picked up Bitcoin news. The general consensus echoed now forgotten internet meme phrases such as “Bitcoin is dead. Long live Bitcoin.” But beyond the Sick Memes™, the economists agreed that it wasn’t going to “stick” and that it was difficult to predict the end of “speculative bubbles”.
Even at this early stage, economists recognized the self-fulfilling value proposition of Bitcoin and other cryptocurrencies. Peter Rodriguez (now of Rice University) commented on Bitcoin’s inherent self-valuation. If it can maintain investor interest to transition from a “fad-like store of value” into “real currency”, it could be revolutionary.
“Bitcoins will have become something entirely new: a true, stateless, virtual currency rooted in nothing other than confidence in the set of rules that surround them.” In 2017, Bitcoin did just that when it ballooned into five-figures-per-coin values.
A survey of 50 economists in Europe showed that most of them don’t fear a cryptocurrency bubble burst. The belief that Bitcoin’s relative detachment from the larger financial systems granted clemency regarding bubble talk.
JP Morgan strategist Nikolaos Panigirtzoglou stood with Bitcoin saying that its trailblazing could morph cryptocurrency into a true asset class. After the first official day of trading Bitcoin futures on December 18, 2017, it seems as if cryptocurrency’s classification as an asset class may soon be solidified.
There is even a new currency known as Tronix whose creator also seeks to “decentralize the internet”. But as optimistic as many are when it comes to both cryptocurrencies and ICOs, other economists portend the worst.
Argument: Cryptocurrency is the Next Bubble to Burst
Among the loudest decriers of cryptocurrency is economist and Nobel Laureate Robert Shiller. In many interviews, he has equated Bitcoin to a fad similar to bimetallism of the 19th century. He isn’t the only Nobel award-winning economist to speak out against Bitcoin.
Joseph Stiglitz said that Bitcoin should be outlawed as it “doesn’t serve any socially useful function.” Given that many black market transactions take place with the currency, his statement isn’t totally unfounded. Cryptocurrency, as mentioned, also skirts regulations effectively making it, as Kenneth Rogoff of Harvard suggested, a perfect haven for tax evasion.
In fact, some attribute Bitcoin’s initial surge to currency manipulation. With two Bitcoin traders recently charged with fraud, the evidence against an unregulated is adding up. So how does this add up to the next financial bubble?
With such volatility, investors can often feel like they “got out too soon” or not soon enough. As financiers of London’s Capital Economics agreed, the Bitcoin “has all of the hallmarks of a classic speculative bubble.”
They count triggers for bursting to be increased regulations and more damaging hacks. In addition to the fragility of speculative bubbles, Bitcoin and other cryptocurrencies rely on non-traditional market placements.
ICOs go Hand-in-Hand with Cryptocurrencies
Though still largely undocumented, the implementation of ICOs informs the success of cryptocurrencies. Following the transformation of the GNO coin displays the intimate relationship between the two.
Despite the innovative transparency blockchain technology offers, some claim it stifles innovation on the whole. Combined with the lack of regulations and seemingly regular hacking of cryptocurrencies, the market is primed for a bubble.
For a final nail in the proverbial, but yet unconfirmed coffin of cryptocurrency, there is Dogecoin. Originally started as a joke, it reached a peak valuation of around $400-million USD. This feels similar to when that long island iced tea company changed its name to “Long Blockchain” and saw immediate profit increases.
Despite all of this, Shiller backpedaled just a bit from his original stance saying that Bitcoin could “totally collapse” or “it could be here in 100 years”. Such ambiguity. Much non-answer. Wow.
Verdict: One Way to Find Out
Though there were those who predicted the giant crash of 2008, some economists, like Shiller, rolled back on their once rigid condemnations of cryptocurrency. The bigger question may not involve Bitcoin and its ilk, but ICOs as a whole.
With another country (South Korea) banning ICOs, cryptocurrency could become extinct before the bubble pops simply due to legislation. Some argue, too, that ICOs are securities and should be subject to the same regulations as IPOs.
Others still say that cryptocurrency valuates itself against itself, so how can you know its true value? This could just be another tulip and bulb craze of the 1630s. Pro-tip: that is credited as one of the first documented speculative bubbles in history.
Unfortunately, the only way to tell if the cryptocurrency “bubble” is bursting or even exists is to wait. Legislation, market fluctuations, and time will tell us all we need to know.
Will Bitcoin see a resurgence in profits and prove economists like Shiller wrong? Did you make money off the volatility of cryptocurrency? Will every article on Bitcoin end with a Dragon Ball Z reference?
Find out next time…