Over the past several weeks (and in some respects, years), Bitcoin has exploded in value.
In case you aren’t familiar, Bitcoin is an example of cryptocurrency, a type of publicly available international currency that exists purely in a digital format. It’s been around since 2009, but has remained existing in relative obscurity until the past few years, when its premise began to be taken more seriously and its value began to explode.
As of the writing of this article, Bitcoin’s value is just north of $16,500. This time a year ago, its value was around $800. Three months ago, it was close to $3,000. That’s an astonishing leap for any kind of investment, let alone a fundamentally new type of currency. So is this skyrocketing price justified? Or is Bitcoin approaching a bubble that’s about to burst?
Is the Increase Justified?
Let’s take a look at some of the factors that could justify or disprove Bitcoin’s overall value:
- The value of the currency. First, it’s important to acknowledge the need for a decentralized, global, digital currency. Digital currencies aren’t backed by any physical standard. If secured correctly (through blockchain tech), they are more traceable, more secure, cheaper, and more reliable than physical currencies. The fact that it can be exchanged freely, anywhere, is also an advantage in the modern world, where commerce unfolds — globally. Some government leaders are already working to introduce a digital reserve currency — which may end up being Bitcoin. Bitcoin is especially valuable because it’s the first major name in cryptocurrency, has a decent history of security and success, and is already generating interest from multiple countries.
- Customer Preparedness. It may be premature to celebrate the value of the currency, however. We also have to remember that this is an entirely new system of currency and economic exchange, and one that not all consumers will be ready for. Traditionalists may prefer today’s typical, physical currency for years to come, and may resist accepting digital currency, introducing major challenges to the cryptocurrency’s market penetration. It may be too soon for a cryptocurrency to develop.
- Hype and Volatility. The intensive publicity surrounding Bitcoin is accelerating, in part, due to how much hype it’s already gotten. The price is extraordinarily volatile right now. Consumer excitement makes that volatility even worse. Though it’s on an upward trend right now, these could be the early stages of a bubble. All it’s going to take is a movement in the opposite direction — a wave of fear — to give that volatility opposite momentum.
Will the Bubble Burst?
Bubbles usually unfold in a sequence of stages: something new is introduced, consumers get overly excited about it, consumers start enjoying the highs of a skyrocketing price, they start selling to reap profits, then they start panicking when the price begins to fall. Once that panic sets in, the price plummets, as seen with the dotcom bubble and housing bubble in recent memory.
So is Bitcoin in a bubble? If so — when is it going to burst?
Bitcoin’s price has undoubtedly surged at an unprecedented pace, and consumers are hyped about the cryptocurrency. To some analysts, these are hallmark signs that a bubble is forming, though this isn’t a guarantee. The trick is figuring out when that bubble might burst, which is easier said than done. Bitcoin could end up rallying even further, to unthinkable heights before it settles back down, or it could crash by the end of the year.
Sometimes, there’s a catalyzing event that sends the price of a highly valued asset plummeting, but sometimes it seems to come out of nowhere.
For now, Bitcoin’s price seems to keep climbing, and enthusiasm for blockchain technology keeps growing — even beyond the realm of cryptocurrency. For those reasons, it’s unlikely that the growth wave will stop in the immediate future.
However, it’s unlikely that the sharp and volatile upward trend will continue unabated for the next several months and years. Even optimists note that its pace may have been too fast to reflect fair valuations. But until the price settles or consumer hype fades, all we have is speculation, since this is the first major digital currency to catch the public’s eye.
Larry Alton is a professional blogger, writer, and researcher. A graduate of Iowa State University, he's now a full-time freelance writer and business consultant. Currently, Larry writes for Entrepreneur.com, Inc.com, and Forbes.com, among others. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing. Follow him on Twitter (@LarryAlton3), at LinkedIn.com/in/larryalton, and on his website, LarryAlton.com. To read more of his reports — Click Here Now.
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