Bitcoin is a bubble. It meets every single definition of one, and will burst sometime. It satisfies the most basic defintion, which also holds true for the housing market in Australia:
If people with no technical knowledge are giving advice on how to profit, it is almost defintiely a bubble
People will back out at the earliest sign of trouble, so I am here to try and show the indicators of what to look out for when it happens. This will be a continuously updated article as I find newer theories and ideas as to how the post bubble world will look for Cryptos.
The best starting point is to analyze previous bubbles. I particularly like the Tulip Fever in the 17th century.
In the 1630’s prices for Tulips started skyrocketing because people heard about the intricate value of the commodity. They also created what was probably the first ever futures contracts, as people were only trading the bulbs of scarce and sought-after varieties. Bulbs were trading as high as 1,200 Guilders per bulb, which was €400,000 Euros.
People would buy bulbs instead of houses, they would take out loans. And even if they knew it was a bubble (Probably not? Since there was no previous documentation of a bubble), they did not care and still bought tulips because they felt they could time the price right (Aren’t we doing that for bitcoin as well?)
There was active trading in the market, and then in February 1637 it all came to a grinding halt. People lost interest in paying such vast sums for the commodity, and the price just came crashing down. The bubble had burst.
As the chart showed it all came to a grinding halt. The main catalyst? A default on a contract for a Tulip led to the crash, as people suddenly realized that there were a lot of faulty contracts out there in the market. The government tried to stabilize prices by offering to honor contracts at 10% the price, but there was still panic over the dramatic fall (BBC).
This is also how I believe that the future Crypto bubble will unfold. The government is trying to warn people not to buy the currencies, and unfortunately the government is probably how the price will plunge.
Government Interference Leading To The Bubble Top Pop
The Government is scared that people will start putting their life savings into an untested trading market. As people start acquiring debt (With high interest rates, might I add), to trade the probability of bubble will increase exponentially. And as much as it pains me to say this, it has already happened. The introduction of the futures market by the CME, along with the ability of people to raise debt in order to finance trading cryptos on margin has increased government awareness of the problem. Governments are raising warnings left right and center on not investing in the currency. I highly doubt any government will bail out major institutions or consumers if they had invested a majority of their income in cryptos. It is this fear which will eventually lead to the crash.
In the past two days, the price of Bitcoin has come down by about $4,000 because of fears of the Chinese government banning the currency. A ban by the US government would be the deathnail, but I do not foresee that happening anytime soon. What may happen is increasing restrictions, which reduce the viability of the currency in the short term.
However, cryptocurrency is here to stay, in one format or another. Ethereum, Bitcoin, Iota or whatever currency that survives will be the center of a massive change in the way we do business. All we can do now is wait, and follow on.
What Would Happen As The Bubble Bursts
Iliquidity in the exchanges
People will find it incredibly difficult to convert their cryptos into fiat currencies. This is slowly starting to happen. As networks continue to get congested, there will be a longer time before it can be converted into fiat money.
Furthermore, there will not be any buyers. There’ll be so many sellers that the prices will trade at 90% of the denominated value. However, there are currently major restrictions in place to convert cryptos by the major exchanges, such that only small amounts can be converted at a certain time. This is hugely beneficial, as the majority holders find it harder to liquidize their investments. Though, I am sure if they decide to back out, they will find a way.
Longer and longer trasactiosn times should worry people, because it decreases the intrinsic value of the currency.
This is where the bitcoin bubble will differ from other currency bubbles. With the large warnings issued by governments, people have not invested significant amounts within the currency. Banks have hesitated taking on cryptos within their portfolio. This has meant that the overall value of bitcoin is still pretty small. Therefore, there will not be any need for a significant bailout, and we can live our lives normally (I really hope).
Once the Bubble pops, consumers will have time to adjust to the new reality that a lot of the cryptos disappear, and only a few will remain at fractions of their initial value. Only a few exchanges would remain, and I hesitate, but think that Binance may be one of them.
But all this must happen, before Cryptocurrencies become a mainstay, as the tech industry has shown. Bubbles can result in very profitable and rational industries, which can prosper for years after they pop.