Is there a Bitcoin bubble?
There are various types of bubble. One of the most common is the bubble of belief. This is where the price of a commodity, stock, currency, whatever goes up and up based not on intrinsic value, but on hype, on people's belief that it will keep rising, on market sentiment, on people's desire not to be left out. People buy because others are buying, no other reason.
Bubbles are also characterised by price volatility, by an 'irrational exuberance.'
Currently around US$ 730, the Bitcoin price has been on an upward trajectory for 12 months or so now. It began the year as US$ 345 or thereabouts, and in June reached almost $770.
There are a lot of good reasons for the current upward direction of the Bitcoin price. Poor liquidity seems to be one explanation, with lack of confidence in the Indian Rupee and a number of African fiat currencies making it desirable. Indeed, in some places Bitcoin is reported to be trading at a massive premium.
And that is the first thing that makes me concerned. I understand why a lack of confidence in available fiat should make people turn to Bitcoin as a store of wealth, or a hedge. But the fact that people are prepared to pay a substantial premium does worry me.
The hype also worries me. I am hearing a lot of 'Bitcoin will reach £1,000' talk. Mostly it seems to be based on nothing more than a desire for Bitcoin to reach £1,000. Sure, some people quote technical analysis, but I am one of those who have little faith in such auguries.
It is a case of 'buyer beware', of course. But I think the very volatility of cryptocurrencies, and the fact that it is a small world, where investor sentiment can spread fast, does lend itself to bubbles. Maybe the price will continue to rise. Maybe we should believe the hype. I don't know. What we do know is that bubbles are only generally recognised after the event. So time will tell.
Image from here