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Bitcoin As a Bubble: 5 Pros and 5 Cons

A favorite entertainment of Bitcoin skeptics is to claim that the first cryptocurrency (same as any other, though) is a bubble. They propose arguments of which some look quite consistent, and when the Bitcoin price drops, they say: “We told you!” But their claims are based on a lack of understanding Bitcoin. In this article, we will suggest evidence that Bitcoin price fluctuations are not symptoms of a bubble, but a normal price dynamic of a young promising asset.

What is a bubble?

A bubble is when a certain asset is being vigorously and thoughtlessly bought under emotion, its price grows much higher than its intrinsic value, and then people see this fact and start selling. We will get back to this concept later.

Price swings as a bubble argument

The main reason to claim Bitcoin is a bubble today — its severe price fluctuations in 2018 and 2021. In 2017, the cryptocurrency showed an unpredictable 900% growth, and then suddenly crashed followed by a long bear market. Today’s situation is similar, yet it’s too early to speak of the current bear trend’s length.

In April 2021, a survey among Bank of America’s professional investors showed that 74% of them consider Bitcoin a bubble. When the coin started tumbling in May, they must have got more firm in their opinion.

There is a sense in the arguments of ‘bubble theorists’, and we understand their concerns. But let’s see what they are and how we can debunk them.

1. Bitcoin is governed by no one

Bubble. Bitcoin isn’t administered by anyone, it’s not backed by the government — unlike fiat currencies supported by huge banks and authorities. Many countries are still skeptical about Bitcoin as something temporary and not noteworthy and even ban it. Without proper management and support from the state, Bitcoin is only kept afloat due to people’s faith.

Not a bubble. Developed nations have legalized Bitcoin a long time ago, and in some countries, it’s already legal tender. Malta has proclaimed itself a ‘blockchain island’ and developed crypto-friendly legislation. Countries that restrict Bitcoin don’t understand it, are afraid of it or want to control the market and the citizens, as it happens in China.

However, this is not the main point. Initially, Bitcoin has been created as an opposition to the world’s financial system, where central banks can print money and boost inflation at their will, and the money that citizens store in banks doesn’t really belong to them. The fact that Bitcoin is written in computer code and its behavior is highly predictable is its advantage. Also, there is a decentralized community of devs who have been successfully developing Bitcoin since 2009.

2. An artificial pump

Bubble. Since Bitcoin isn’t backed by anyone, it’s being artificially pumped by those who take profit from its price growth. Eventually, this will end, and the bubble will burst.

Not a bubble. Here’s what really is prone to pumps — tokens with no use cases that have carried out a shiny campaign and don’t show any signs of evolution since. These are actual bubbles. In the case of Bitcoin, thousands of people affect its price, and even if someone wants to artificially pump it, they will not succeed due to the lack of resources. This is how decentralization works.

3. Hype attracts new market participants who further expand the bubble

Bubble. To continue the previous argument — when a hype takes place, more and more people feel FOMO and join the craze, thus enlarging the bubble even more. This is what happened in 2013, in 2017, and between 2020 and 2021. After record-high market activity, the price fell from $20,000 to $3,200 in 2017 and from $64,800 to $29,000 in 2021. These numbers indicate Bitcoin is nothing but a bubble.

Not a bubble. People join the craze because they see an investment opportunity, A strong buyers’ pressure provokes price growth, but the market self-regulates: when the price reaches a certain point, sellers join the game and start taking profits. When the market is overhyped and overheated, the growth may continue, but the subsequent correction will be deeper. We have never seen a total zeroing of Bitcoin.

4. Bitcoin doesn’t have value

Bubble. This one is the Bitcoin skeptics’ favorite: the coin has no real value. It’s just a computer code, not backed by anything, its price is based on thin air.

Not a bubble. Remember the definition from the beginning of the article? A bubble is then an asset’s price is much higher than its real value. But no one knows what this value is. When a skeptic claims they know Bitcoin is a bubble, they are saying they know its value, which can’t be true. The technology is still young, traditional metrics are barely appropriate for its assessment, and its potential is yet to be unleashed.

5. Bitcoin is not used outside the crypto world

Bubble. To date, very few businesses use Bitcoin because it is complicated and slow.

Not a bubble. This fact is hard to argue with: Bitcoin adoption isn’t going fast. It’s really not convenient as a means of payment — but there are many alternatives. In Tokyo, you can buy almost anything with Bitcoin Cash. But the key value of Bitcoin is not that you can pay with it: it’s that Bitcoin is scarce and inflation-proof, and many invest in it as a hedge against inflation and a store of value for the long term.

Some historical examples

Bitcoin has been growing with ups and downs for 12 years. When it cost $20, skeptics told us not to invest. At $200, they suggested the same. But how is today’s situation different? There are even more institutional investors creating their stashes of Bitcoin. A bubble is when the growth can be solely explained by hype. Anyone can make a mistake, but would so many companies invest in Bitcoin if it were a bubble? Bubble theorists’ thinking is biased: they only consider the worst scenarios and ignore the others.

Let’s look at the Dot-com bubble. By 2001, many trendy Internet companies had emerged, and their stocks quickly appreciated. After the charm was gone, it turned out that many market participants were just hyping on the technology itself, not offering any real value. The market collapsed, many went bankrupt, but then, steady and mature growth took off. In this sense, many crypto projects and partially Bitcoin would qualify as bubbles — yes, the price collapses significantly sometimes. But after each of such drops so far, we have only seen even bigger growth, not the disappointment.

What should crypto pessimists learn about Bitcoin?

Certainly, Bitcoin skeptics will find their arguments for each of our counterarguments. In any case, there are a few things hard to argue with:

  • The price of Bitcoin grows because people see it as a revolutionary financial instrument. And it is not an asset that can be easily voluntarily pumped.
  • The price of Bitcoin grows because more and more people start using it and investing in it. The network effect is growing.
  • The fact that Bitcoin is not backed and controlled by governments makes it predictable and inflation-proof.

It’s good to invest carefully. Investment is a balance of caution and risk, and for bubble theorists, there’s only risk. Don’t seek advice from those who don’t understand Bitcoin or only see the worst scenarios. Do your own research and draw your own conclusions.

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