The short answer is “no”, the Bitcoin “bubble” won’t pop. Not yet anyway.
The main point of contention is whether “Bitcoin” is a bubble at all. Looking on forums and other Internet community discussion boards will all have two distinctly differing opinions of whether Bitcoin is a “bubble” or not, with one side sitting firmly in the camp that it is and the other vehemently defending it.
The problem with Bitcoin is that it has no core value. This means that any price you attribute to it has to be based on what the “market” thinks it’s worth. With “traditional” (most would call “real”) asset classes, their value can be determined by how much of a return they’ve been generating for their investment (known as ROI / Return on Investment). Get started with cryptocurrency mining today; even as an individual you have the power to mine coins.
The idea is that they will take capital to purchase land/machinery/raw materials and produce a product with that capital. The product can then be taken to a marketplace, where people will pay a price higher than it took to create. This is where “real” assets get their prices from.
Unfortunately, the world of cryptocurrency has none of the this. A cryptocurrency can be created overnight (ALL the code is free and open source), which means that the notion of supply/demand is somewhat quashed. On top of this, you have to appreciate why the price of the asset is increasing almost daily. This is where many seasoned investors are starting to call it a “bubble” as many people are simply buying it as a speculative gamble. No surprise given the soaring prices.
In this tutorial, we will examine what’s causing the price to rise and – ultimately – whether we should be considering it as a “bubble” or not. This is NOT meant to be financial or legal advice…
The “herd” mentality is basically what causes humans to do stupid things (if it’s working for him, maybe I should try it). This mentality – part of the most ancient area of our brain – is what defines everything from fashion to whether a certain president is elected.
One of the most demonstrable parts of the “herd” mentality is with economics, especially when it comes to what are known as “bubbles”.
The first “bubble” was the “Tulip” bubble of the 1630’s, which took in 1,000’s of unsuspecting Dutch men & women who sold what amounted to most of their possessions to “invest” into Tulip bulbs on the premise that wealthy aristocrats would buy them.
This did not happen… but whilst it’s easy to mock the people of that time, what’s important is to look at the lesson we can glean from it. The “bubble” of the 1630’s didn’t just happen overnight – people didn’t turn into mindless zombies in a vain attempt to become materially wealthy. They were following an abundant secondary market which sprung up in order to “supply” people with opportunities to buy particular types of Tulip bulbs.
Much akin to the “gold rush” days of the 1850’s, or even the stock market bubble of the 1920’s, .com bubble of 90’s or even the sub-prime mortgage bubble of the early 2000’s, the Tulip bubble was fueled by a HUGE internal market of traders.
To explain how it works – someone will see a large return on a particular trade. This trade may be an outlier, but soon someone else decides to try and sees a similar return. A new goldmine has been found – a new market ready for new suppliers etc. Surely this means everyone is going to get wealthy!
Whilst there are a few customers in the new consumer market, what’s MORE abundant is the secondary business-to-business market which springs up as a way to supply the businesses capitalizing on the new demand. This is generally where bubbles come from, as it’s the activity in this secondary market which causes people to convince themselves of “easy money” .
This is EXACTLY what has happened with the “crypto currency” mania we are experiencing today. Whilst not a “bubble” entirely, it has ALL the hallmarks of what happened in the past (general delusion)…
The four most dangerous words in investing are…
‘this time it’s different‘ – John Templeton
Blockchain Explained (Exposed?)
To fully understand the state of the “bitcoin” market, we need to appreciate what it is and what the technology might mean for the wider public.
Bitcoin is based on a new type of technology called “Blockchain”. This is a type of decentralized database, which basically allows people to keep their current data structures not just up to date but also in line with 100’s or even 1000’s of sources (as opposed to a single source as provided by government or business).
The point of Blockchain is that it’s not really a new technology. It’s been done before with something called “GIT“…
Git is a type of source code management system which allows software developers to save all their code in something called a “repository“. This is essentially a mini database which stores new versions of the software’s source code in updates known as “commits“.
Each time a developer wants to add functionality to their codebase, they’re able to “clone” the repository from an Internet server, edit the code and then “commit” their changes. The changes are then “pushed” to the Internet server, updating both repositories.
Inasmuch as GIT allows software to keep a running tally of their code, “blockchain” allows any computer user to keep a tally of their data.
VERY similar to GIT, blockchained data is stored in a central repository known as a “chain”. These chains can store any sort of files or data (known as “blocks”). The idea is that each time you create a “block” in a blockchain, it’s a new set of data which have either been added or edited in the chain. Learn about Bitcoins Rivals here.
The best way to explain it is with the analogy of a telephone directory.
Standard telephone directories are VERY similar to how filesystems & databases work today – their data is stored as rigid listings that don’t change and are not accountable.
Because there is only ONE source for the data, there is no imperative to keep it up to date, nor to ensure it’s validity. This is why it’s very easy for a large central database to become disjointed or filled with erroneous data (because it’s never updated).
What “blockchain” proposes is the ability to have DYNAMIC listings in thedirectory. Whereby each listing will be completely decentralized (meaning ANYONE can add/change/edit the data – depending on their authentication level), and thus keep ALL the numbers completely up to date at all times.
This idea sits at the core of the next wave of computing, where files on your system will no longer be “static”, but actually have the ability to be dynamically updated and sourced from 100’s of different providers. It’s also the
Where Bitcoin Sits On “The Blockchain”
Part of the “blockchain” phenomenon has been the rise of “cryptocurrency”.
Crypto currencies are simply individual chains on the blockchain. There’s no wizardry or hocus-pocus. They’re just a bunch of files stored on 100’s of servers…
The different with “crypto” currency… however… lies in the term “crypto”. They’re all encrypted – which means that ONLY people with the correct key (hash) can access them.
This is how Bitcoin was developed – as a public ledger of financial transactions, where ONLY people with appropriate access could use the “coins” (blocks) produced by the system. Bitcoin, Ethereum etc are just encryption algorithms used to encode particular data. find out about algorithms here.
When you “buy” a Bitcoin, you’re actually just buying an encryption hash, used to “unlock” a particular Bitcoin’s block on its blockchain. Inside this block, you’re able to create a ledger of transactions which will determine who owns how much Bitcoin.
Whilst this seems complicated (it is), you must remember that every few years, a “new” opportunity is presented in this way (never been done before etc). The hallmark of whether this is used as a way to sucker people out of money is by making it seem like a really complicated proposition.
Bitcoin is nothing more than a series of encrypted files stored on a large number of computers. These files are continually updated with new transactions, and are then able to validate these transactions with other data in the network.
The key to Bitcoin’s success lies in the services built around it. Whilst it may seem quite overvalued, it’s main benefit is providing people with the ability to transfer money overseas without the regulation of a bank or government on their back.
So It’s A Bubble?
At the moment, the price of Bitcoin is indicative of a speculative bubble. The Guardian thinks so.
The main problem is that it’s not the consumer market which is driving the price higher, it’s the B2B secondary market, which generally has no stake in whether the asset is successful or not. This secondary market is thriving off selling the “coins” to themselves, creaming off a profit on price fluctuations. There is negligible value in the proposition itself right now.
Whilst there is *some* value in the underlying “blockchain” technology, the coins themselves are not worth $7,000+ that the market would have you believe. The only indicator of value should be in the services which are willing to either accept or be built around Bitcoin / the other crypto currency.
Currently, if you’re looking at making an “investment” decision on whether it’s going to be a profitable asset, the only thing to say is “stay away” – it’s not worth fighting speculators who are only trying to make a quick buck.