Ever since the inception of Bitcoin, but especially following its jump in popularity in 2017, there have been questions on whether it is safe to invest. Nobody wants to lose their life savings because of FOMO (Fear of Missing Out); therefore one of the most common questions newcomers ask is: is Bitcoin a bubble?
Is Bitcoin a bubble?
According to Charles Kindleberger’s life’s work “Manias, Panics, and Crashes: A History of Financial Crises”, a financial bubble can be defined as “an increase in asset prices that can’t be justified by its fundamentals.”
\"Manias, Panics, and Crashes: A History of Financial Crises” book cover.
So, an economic bubble is trading in an asset at a price or price range that strongly exceeds the asset's intrinsic value. In our financial history, we have many examples of a typical bubble:
- Dutch Tulip Bulb Mania 1636-1637
- Mississippi Company 1719-1720
- Gold price bubble 1975-1982
- Dotcom bubble 1995-2001
- US real estate bubble 2000-2008
The best-known economic bubbles in history. Source: Allianz Global Investors.
The Bitcoin bubble(s)
How much of a bubble is Bitcoin? This is hard to know, as bubbles are often conclusively identified only in retrospect, once a sudden drop in prices has occurred.
As of now, several things are clear: bitcoin fundamentals are rapidly increasing every year, as there are thousands of brilliant open-source developers and contributors who are working hard on improving the Bitcoin ecosystem daily. On the other hand, Bitcoin certainly checks some characteristics of a bubble but it also has experienced numerous speculative boom and bust cycles (Bitcoin bubbles) in the past, and it still has a long way to go before it becomes a stable currency.
Bitcoin historical bubbles. Source: ChartsBTC / Twitter.
Cryptocurrencies are fundamentally different from traditional assets. Answering the question “Is Bitcoin in a bubble?” is tricky because while Bitcoin may be exhibiting behaviors of a bubble, it has also not yet completely fallen through, so we cannot know for sure. It may as well be a young asset class which is meant to go through numerous price bubbles before it finally matures.
Therefore, anyone who wants to put their money in bitcoin (BTC) should follow the golden rule: never invest more money than you can afford to lose.
Be aware that bitcoin is the first scarce digital asset of its kind, so it is still pretty much a social experiment at this stage. Be reasonable with your choices, do not FOMO, and avoid getting sucked into another bitcoin price bubble with money you can't afford to lose.