Earlier this year, the price of the electronic currency Bitcoin was rising dramatically from $10 up to $270, making its early buyers rich and everybody else were shouting “this is a bubble!”
The Price of a Bitcoin was then quickly crashing down to about $70 everybody who was screaming “bubble” could feel smart. And now some month later we are at $765 that is incredible! And so once again people who believe in Bitcoins are crowing and everyone else is mumbling about bubbles.
Who is right?
In my opinion it is everybody. Why?
Well… Bitcoins are the perfect asset bubble like the tulip mania back in 1637.
Like the tulip mania Bitcoins have no intrinsic value and there is no way to value a Bitcoin. There is nothing constraining its price other than supply and demand. As long somebody new can be convinced to buy Bitcoins the price will raise. In theory prices of a Bitcoin can go up to $10,000 or $100,000 or even $1,000,000. And the funny thing is there is no way to prove that the price is too high. That means prices could go up for years.
Classical bubble characteristics:
- The said participants usually fail to recognize whether they and other traders may be engaged in a bubble which lack considerable support from accepted valuation methods
- Most participants are only able to recognize it after the bubble has burst
- They can inflate much more and last much longer than most people think
- People who are early involved can get incredible rich
- A lot of small bubble pops are leading to a massive bubble
- Suddenly the bubble burst, without any particular warning and wipes out most of its gains (not true yet)
The five steps of a bubble:
- Displacement: Investors get enamored by a new paradigm
- Boom: First prices are slowly rising, small bubble pops but then gaining strong momentum
- Euphoria Prices of the assets are sky rocking. Caution is thrown in the wind.
- Profit Taking: Smart money is selling positions/taking profits
- Panic: Asset prices reverse their course and fall rapidly
It’s no coincidence Bitcoins started to get popularity from the public at the same time the meltdown in Cyprus was happening. At that time political forces start impacting one group of assets, bubbles pop up to fill whatever voids are left behind. Bitcoins was rising because Cyprus made it look as though no form of “real” currency would be safe.
The same political force, the governments around the world might decide that Bitcoins undermines the value of their own legal currencies and start to ban it. In the U.S and in other democratic states only the government is allowed to give out and create money.
But there are more risks that could bring Bitcoins to a free fall. The technology behind the Bitcoins could be hacked; Bitcoins could be stolen from their owners. (Just type in Google “Bitcoin hacked”)
There were several Bitcoin exchanges hacked already, these were small ones, but what happens when a page like MTGox gets hacked?
Or even worse the algorithm gets cracked and there are suddenly counterfeit Bitcoins in circulation?
The chances are also quiet low to gain mass market acceptance. The majority of Bitcoin buyers are investors/speculators, rather than people who intend to use it as a currency to buy and sell things. If a currency is not used, it has no value. With it I mean that you cannot go into a a normal supermarket and pay with Bitcoins. You can also not pay your electric bills or your taxes with it. But of course you can use Bitcoins for purchasing things on the web. I will give some interesting examples that are worth paying a visit:
Coinmama.com Buy Bitcoins with Your Credit Card or Western Union
Bitdomain.biz Anonymous Domain Names and Web Hosting
Miningmonitor.com Provider of the Most Advanced Monitoring for Your Bitcoin Miners
Namecheap.com Anonymous Domain Names and Web Hosting
Cinfu.com A Good Hoster that Excepts Bitcoins
Localbitcoins.com Directory of Local Buyers and Sellers of Bitcoins
Bc-casino.com World’s First Bitcoin to Gold Exchange
Bitcoindarts.movoda.net Biggest Bitcoin Casino
Switchpoker.com Bitcoin Poker Room
Satoshi36.com Bitcoin Lottery
Earnfreebitcoins.com Small Amounts of Bitcoins in Exchange for Visiting Websites
Bitcoinget.com Earn Bitcoins for Watching Videos and Completing Simple Tasks
Bitvisitor.com A Place Where You Get FREE Bitcoins
Coinurl.com Provider of Banner Ads
Coinad.com PTC Provider (Paid-To-Click) That Pays You in Bitcoins
But most likely some other kind of Bitcoin could replace the Bitcoin. But like so often time will tell who is right.
Peter Schiff has posted some great videos on YouTube he is the author of “The Real Crash: America’s Coming Bankruptcy” take a look:
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- Charlie Munger Oil Will Become Incredibly Short In Supply In The FutureNovember 30, 2013
- “Warren Buffett’s New Toy” or “OPEC’s Worst Nightmare” – Promoted by Motley FoolNovember 30, 2013
- Shipping Stocks are RisingNovember 30, 2013
- The 8 Best Gifts for Whiskey LoversNovember 28, 2013
- The 10 Most Shorted Stocks by HedgefondsNovember 25, 2013