From the get go, there was a mystery that surrounded Bitcoin it’s creator Satoshi Nakamoto brought to life the digital currency as the first decentralized peer-to-peer payment network that is primarily powered by its users, with the benefit of having no centralised authoritarian body.
Bitcoin works by using a public ledger known as block chain and this le dger contains the information of every Bitcoin transaction. The brilliant aspect that makes blockchain so attractive is that the information that is held on the block chain network exists as a shared database. This means that it’s readily available for anyone to access on the Internet, as well as not being stored in one centralised location for a hacker to gain access and corrupt the data.
With the use of Bitcoin becoming increasingly popular to facilitate transactions, the speculative bubble also increases too. As of right now, the price of Bitcoin has surged passed the $8000 mark, and it shows no signs of slowing down anytime soon!
What makes Bitcoin so attractive?
First we need to establish why Bitcoin has value. When we look at fiat currency, like the US Dollar or the British Pound as well as many other currencies, they are declared legal tender by official governing bodies such as Central Banks. Even though they are declared as legal tender, they are not backed by a physical commodity.
What gives it its value is the relationship between supply and demand, rather than the material the fiat money is made out of. Historically, money was based on physical commodities such as Gold and Silver, whereas now, physical currency is solely based on faith of the economy and is deemed “as good as gold”.
What separates Bitcoin from fiat currency, is that the physical cash we carry round in our pockets every day, is continuously being created. Whereas there is only a finite amount of Bitcoins available. In fact the number of Bitcoins that can be mined stands at 21 million.
Bitcoins are given value and made attractive, because other people give the cryptocurrency its value. It has been recognised as a method of payment of goods and services, and has the characteristics of money but is backed by mathematics, rather than physical goods.
“Something’s come along and it’s burst our bubble!” Check out this intro to cryptos.
There are plenty of people ranging from analysts, business owners to ordinary people, who think that Bitcoins time is going to come to an abrupt end. Look at other famous bubbles in history:
● Dot com bubble which occurred in the 1990’s and was the focus of a rapid rise in equity markets, fueled by investments in Internet companies.
● The 2008 housing market crash which saw the subprime mortgages being sold to consumers with less than perfect credit. These subprime mortgages made up 20% of the market and when those people couldn’t afford to make the repayments, that’s when the house of cards came tumbling down.
Apply the 1000%/10 year rule
Many people think a sharp rise in price is what creates a bubble……….No. An over-valuation of an asset that has been artificially propped up, which leads to a sudden downward correction is what constitutes a bubble.
There have been certain clues to look out for to spot a bubble, one of which is the 1000%/10 year rule. Canadians are familiar with this.
Allow me to elaborate.
The 1000%/10 year rule stipulates that if an asset appreciates in value by 1000% within the space of 10 years, then evidence therein points to the conclusion of that asset pertaining to be a “bubble”.
Global strategist Jeff Kleintop states:
“Bubbles typically bring risks for all investors, even those that don’t own the inflating asset,” he explained, “because they represent a broader market and economy that has become out of balance and dependent upon a flawed outlook”.
History has reliably informed us that, these bubbles in the past have inflated over 1000% over a 10 year period, before bursting and cutting prices by more than half in 2 years.
From the chart above, you can see that assets such as crude oil, NASDAQ, silver and home-builder stocks have been used to prove the point.
So where does Bitcoin fit into all of this. Well if you apply the rule to the cryptocurrency, you’ll notice something quite remarkable.
Trust me, there’s no need to adjust your screen, you are seeing that right. With assets like crude oil and silver taking a modest 10 years to appreciate to the 1000% valuation. The cryptocurrency has consumed too many Redbulls and has catapulted to the 1000% valuation in 2 years!
So is this evidence of Bitcoin being a bubble? Well no one can know for sure yet (unless a time traveller is reading this). Although the pattern does seem to fit with prior bubbles, I believe there is still a while yet, before we see anything of significance which could destabilize the cryptocurrency and bring about its downfall.
Learn about how to get started mining every day here.