What is a bubble?
A bubble is basically an economic cycle where in the price of an asset escalates at an unprecedented speed and then collapses immediately. The high asset prices are based on implausible views about the future. After the Tulip bubble in 17th century Europe, Dot-Com bubble in 2000 and Housing bubble in 2008, these days the Bitcoin bubble is the most talked about subject.
Why is Bitcoin called a bubble?
The price of Bitcoin has been the fastest to rise in the history of any speculative investment vehicle. But there are certain concerns about accepting it as a global currency because it cannot be regulated by any government or bank. On one hand, Japanese are using Bitcoins to eat and shop, on the other hand, China has banned Bitcoin exchanges. This raises questions on the convertibility efficiency of Bitcoin in nations where it has been banned. Bitcoin also does not satisfy the three main criteria of a currency:
- Unit of Account: Bitcoin is not a unit of account for anyone because it is a deregulated currency.
- Medium of Exchange: Very little acceptability as of now, not even legal in many countries.
- Store of Value: With such high daily volatility, it cannot be a store of value. It needs to reach an equilibrium price.
The rise in the price of Bitcoin is purely because the investors want to earn returns, there is no rational backing for such a high rise in the price from its intrinsic value. Since intrinsic value is difficult to ascertain of a new asset, investors simply buy because the asset is going up. Because of the above reasons, there might come a day when nobody will be ready to buy the Bitcoin at a very high price because of its drawbacks and legal issues, leading to a massive sell-out and a sharp drop in the price, that is when the bubble will burst.
Nobody for sure knows, whether Bitcoin is investment or money. Till the time the price of Bitcoin equalises and it can be used as money, people are using it as an investment because of its high volatility.
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Author | Akanksha Goel