When it comes to Bitcoin, everybody is genius because everybody is making money. It is one of the biggest bubble ever seen after Tulip bubble in 17th century.
Tulip bubble was formed when prices of fashionable tulip rise significantly high in Holland than underlying value of flowers. Everyone started to deal in Tulip which increased scarcity and demand. Soon prices were so high that people started to trade their lands, houses, and life savings to get these tulips.
As in many speculative bubble, some prudent people started to sell and crystallize their profits which initiated sell wave across market and soon bubble busted. The other giant bubbles which we had were dot-com bubble in 2000 and housing bubble in 2007.
If you look at characteristics of bubble, price rise slowly first and then gain momentum as fear of missing out and once-in-a-life-time opportunity hold strong position in people’s mind. People believe its price will go higher and higher. Now ask any Bitcoin investor and he will tell you, Bitcoin will never lose value. Some are claiming it will hit 100 000$ and John McAfee predicted Bitcoin price to reach 1M$ by 2020.
Like Tulip bubble, we see clear bubble pattern in Bitcoin as people are trading their life savings, houses to buy Bitcoins.
According to Business Insider, 40% of the world’s Bitcoins are held by just 1000 people which means these 1000 people have strong influence on Bitcoin prices. That makes it even more risky as its value is not based on some underlying value.
What is value behind Bitcoin? It is NOT a traditional investment like stocks. A stock represents ownership of a part of company and companies have products, machines – real assets and earnings. The reason that Bitcoin is worth so much right now because someone else is willing to pay more for than you are. That’s a definition of speculation not investment. Risk of loss is offset by possibility of huge gain which we see in Bitcoins or any other cryptocurrencies. One might call it gambling rather than investment.
Will Bitcoins or other cryptocurrencies stay forever? May be but we need to see how it will perform in depression or bear market. I believe Bitcoin will not sustain its value. When it will happen? It might take some time but crash will happen for sure.
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