THE BLOG

Is Bitcoin A Bubble?

15/12/2017 13:57 GMT | Updated 15/12/2017 13:57 GMT

Yes. There is no doubt that the price of Bitcoin is showing all signs of a bubble ripe to burst. Within just one year the price has risen by more than 1,000%! How sustainable is that?

Look at how it compares to the dot-com bubble.

WSJ
Bitcoin vs dot-com bubble

Unlike the dot-com bubble, however, there is no underlying economic mechanism to keep a check on the price of Bitcoin. It's only worth what someone else (the greater fool) is prepared to pay for it.

Fundamentally internet companies are valued on revenue and profit. So it eventually becomes obvious when they're hugely overvalued in the stock market. That doesn't apply with something like Bitcoin. There's no benchmark. It's a brave new world. The moon's the limit.

But of course the dot-com bubble burst wasn't the start nor the end of the internet. It led to the growth of some of the world's largest companies today (Amazon, eBay, Google etc).

The burst was just a natural correction as the technology broke into the mainstream. People simply got a bit overexcited - that is, once they finally 'got it'...

Everything that the internet went through at the turn of the millennium is happening right now with Bitcoin, but at a faster pace.

It's still early days, and the price volatility is unlikely to settle down at least until all 21 million Bitcoins have been mined.

But whether Bitcoin is a bubble only matters if you are playing the high-stakes game of price speculation.

What really matters is the breakthrough of the technology, and what it could mean for the future of money across the world.

Whatever the price, Bitcoin is here to stay.

We should all want to be a part of the conversation going on around us. And be equipped to cut through all the hype, myths and scaremongering in the media.

Learning by buying

As the editor of Save the Student, I've been swamped over the past month with questions from students asking:

“What's this whole Bitcoin fever about?”
“Actually, never mind what it is, how do I get in on it?”

Until a few weeks ago, I didn't have much of an answer myself. But knowing that students and others are turning to Bitcoin and other cryptocurrencies blindly expecting to make quick money shook me into action.

Should we - as a student money advice site - be paying Bitcoin lip service at all?

I spent two weeks digging deep, understanding what Bitcoin is, how the Blockchain technology it uses works and whether it's legit.

As much as I donned my best-dressed skepticism, after hours of TED talks, reading journals and listening into Twitter conversations... I bought some Bitcoin.

It was surprisingly very easy in the end, but it became apparent that there's a huge deal of confusion, misinformation and scamming going on out there.

I was not getting involved to make money (though I'd be lying if I said I was unhappy about the growth since) and I would not recommend anyone considers buying Bitcoin with that motivation.

After lots of research, buying some Bitcoin was ultimately the only way to properly appreciate the cryptocurrency's use and appeal. There's no substitute for learning by doing.

I'm now of the opinion that cryptocurrencies (and more broadly the Blockchain revolution) are going to be a BIG part of our future. Some argue that the surge in Bitcoin's price is because it's only just crossing in to the mainstream. Classic supply (increasingly limited) and demand (exponential).

There are many other cryptocurrencies following in Bitcoin's wake - such as Litecoin and Ethereum - which have also experienced meteoric growth (bubbles?) in recent weeks.

So my answer now to students questioning Bitcoin is: yes, get involved to learn. Exchange £10 for a fraction of Bitcoin. But be ready to lose it all.