bitcoin ecosystem

The Head and Tail of Bitcoin Bubble

More than as an instrument to buy and sell goods and commodities, increasingly money is being invested in bitcoin to make even more money
The Head and Tail of Bitcoin Bubble
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Bitcoin’s valuation is currently frothier than your morning hot cup of coffee. It ain’t like any other bubble in the past, claims the global economists. In definitive terms, in a fraction of time it obliterated even the year 2000 dot-com bubble (biggest in recent history) by spiraling more than twice its value. That’s what market pundits have been saying vociferously and freaking out over looming danger of financial doomsday. But the young industry players continue to see only real coffee and no froth at all.

More than as an instrument to buy and sell goods and commodities, increasingly money is being invested in bitcoin to make even more money. This is much like investments in appreciating asset classes like gold or real estate or bonds on the other hand. For bitcoin’s value, where even sky doesn’t seem to be the limit, it has become the new investment class for generation Y.

Demand-supply Gap

To understand if it is even a bubble – let’s look at few of the fundamental benefits of bitcoin over traditional money (traded digitally or offline). First, it is a smarter form of money that doesn’t require cost and time in managing it by individuals or government and banks and be used to buy and sell things. Second, the time taken to buy or sell bitcoin or exchange it for local currency is just few seconds being a one-world-one-currency unlike money. That’s because you can do so from any of bitcoin exchanges globally. Third, enhanced security of personal information in making transactions than money since it is blockchain-based. This also renders control of any central authority like government or company quite ineffective.

Fourth, low to no-fee for making payments unlike using cards for transactions. Hence, there is a hockey stick growth in bitcoin demand. But there are only finite bitcoins that have been mined (releasing new bitcoins for use in market). The reported number of coins already mined so far is 16.5 million while the cap (as per global protocol) on bitcoin mining is limited to 21 million coins.

“I don’t see the rise in bitcoin value as a bubble. If there is a private asset and it has a strong demand then the price will go up. It is a simple demand and supply math. The interest of Indian users in bitcoin reflects what’s happening globally,” says Arpit Agarwal, Principal, Blume Ventures.

The early-stage fund backed Indian bitcoin exchange Unocoin with $1.5 million in September last year. The belief that bitcoin is for real, stems from the strong underlying notion of disruption of currency (if not replacing) in future. However the question - how much would be gained if you have been an early investor in bitcoin versus those who join the party late still doesn’t have clear answers.
“Practically bitcoin may not replace money in areas where using physical money is simpler than bitcoin, for example local street vendors. But it is not hard to imagine that in next 20 years, bulk of whatever money transaction we do, will be based on blockchain,” adds Agarwal.

Mini Bubble Bursts

If at all a bubble, then if we look at the history of rise in bitcoin’s value, there has been multiple mini bursts in its value post 2008-09 when bitcoin transactions began. Among the prominent bursts was first in December 2011 when its value dropped to $2 from $31 per coin. Second burst was in December 2013, when the price fell from $1,242 to $600 per coin.

In March, it almost crashed to just $300 per coin. Its real peak started in January this year from $800 to all the way up to $5000 – the highest it touched in September this year before it again went down by almost half to $2900 in the same month. This was because of China’s crackdown on bitcoin exchanges or initial coin offerings. However, it again bounced back in the following month to an all-time high figure of $5,856 on October 13 (as per bitcoin news site CoinDesk).

“After every burst, the value again goes up to new heights. This is not quite true with any other stocks or commodities. So it is quite unique in its own. Also the percentage by which it crashed every time has reduced. So the ecosystem is quite confident that it will go beyond $6,000 before there is a similar burst. This doesn’t show that it is a bubble,” says Sathvik Vishwanath, Cofounder and CEO, Unocoin.

However, the volatility in price will eventually stabilize. “It is quite new to a lot of speculation but the rate at which it is volatile right now is much less than the rate at which it was volatile three years back. But we are very far away from stabilization in price, it will take not less than five years,” he adds.

Indian government, too, has been mulling on forming policy framework to ensure that bitcoins are not used for black money or illegal individual and business transactions. While the world is still divided over start-up or tech bubble or has it been a phase for market correction, the bitcoin bubble is too far to be decisive.

Nonetheless, since blockchain-based cryptocurrencies and bitcoin particularly will change the way we transact online, it would be hard to label it as a bubble. That’s because even if bitcoin’s value plummets, it would still be around in future. So unlike in previous bubbles where nothing of value was left after the burst, bitcon would still survive. But if it doesn’t survive, looking at its rise primarily based on speculations and herd mentality to invest for great returns instead of understanding it, then it might turn out to be the biggest financial disasters in the mankind’s history. After all, the initial symptoms do point towards great degree of hollowness in its value in such a less period.

(This article was first published in the November 2017 issue of Entrepreneur Magazine. To subscribe, click here)

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