It’s been a wild ride the last few weeks. At least in terms of Bitcoin.
At the beginning of the year, one bitcoin was going for just over $1,300. By the end of May, a bitcoin was selling for pretty close to $2,300. On May 25, Bitcoin hit a high of $3,894.
That high was followed by a correction that resulted in a huge loss of value. However, even so, if you bought Bitcoin at the beginning of the year, selling at the end of May would have resulted in a good profit.
One of the questions that has been floating around recently, though, is whether we are moving into Bitcoin bubble territory.
Why are People Buying Bitcoin?
A Bitcoin bubble might be looming as people look to get in as the cryptocurrency rises relative to the dollar.
The price of a bitcoin has been skyrocketing in recent months. After a great deal of volatility a few years ago, now Bitcoin seems to be on a mostly-constant upward trajectory. Even with the recent correction, enthusiasts insist that Bitcoin still has plenty of room to run.
And that’s one of the big reasons people are buying Bitcoin. They see how quickly it’s gaining on the exchanges, and they want a piece of the action. In many ways, Bitcoin is being treated like an investment. It’s an asset that people are excited about, in an asset class (cryptocurrencies) that is getting a lot of attention.
However, Bitcoin isn’t just about investing in something that seems to be gaining value fairly constantly. You can use bitcoins to buy products and services. What many of us tend to forget is that Bitcoin was originally meant as a medium of exchange. People don’t just buy Bitcoin for the investment potential; they also like to use it as a way to pay others instantly. Costs are low
People don’t just buy Bitcoin for the investment potential; they also like to use it as a way to pay others instantly. Costs are low. Plus, you don’t have to worry about exchange rates and government middlemen.
Bitcoin Bubble? How Sustainable is This Run?
While Bitcoin has almost entered the mainstream as a form of payment, the reality is that alternatives are popping up. These are alternatives that are less expensive to acquire.
For the crowd that likes using cryptocurrencies for the exchange of goods and services, Bitcoin is starting to fall out of favor. Trying to add Bitcoin to your wallet can be a tedious process. Because of the skyrocketing price, people want to buy bitcoins as investments, rather than actually pay someone else with them. Plus, mining bitcoins isn’t exactly easy.
Many entrepreneurs and others who like using cryptocurrencies are starting to turn to alternatives like Dash and Ethereum. These are cryptocurrencies that are a little easier to get without costing an arm and a leg.
So, if the demand for Bitcoin as a medium of exchange actually does decrease in the coming months, does that mean we have a Bitcoin bubble that might burst? Or are there enough investors and speculators willing to keep putting money into the exchanges to keep this thing going?
And, of course, another question is whether or not Bitcoin will find an equilibrium. Even with other cryptocurrencies gaining in popularity, Bitcoin is still (at least for now) the most well-known. It’s probably still going to be used for goods and services, and there will still be hardcore users willing to keep the faith.
What are the Signs of an Investment Bubble?
It’s true that you might be able to get in on profits when you invest (or perhaps speculate?) in Bitcoin. However, there are some indications that we might be in a Bitcoin bubble.
Some of the red flags to watch out for when looking at an investment and evaluating it for bubble status include:
- Rapidly rising price: Fast appreciation is one of the hallmarks of a bubble. Even with setbacks, gains seem to be coming at an unbelievable rate.
- No one seems to care about the fundamentals: It’s no longer about the fundamentals of an asset. Instead, everything becomes about the price and the performance. Discussions aren’t about underlying strength.
- There’s a lot of hype surrounding the investment: If there seems to be buzz about the investment everywhere, that could be a sign of a bubble. If “regular” people you know at work are talking about, and if all the news in the media is good news, it could be the sign of a bubble.
- Get rich schemes abound: You see all sorts of “programs” and “systems” surrounding the asset. The idea is that there is a special secret that allows you to get in on the gains. When something has a certain level of hype, it’s only a matter of time before the get rich schemes follow.
- Talk of how this investment “changes the rules”: One sign of a bubble is the idea that this investment is something new. The “old rules” don’t apply. As a result, you won’t see an eventual downturn with the asset.
These are some of the signs of a bubble. And it’s true that a Bitcoin bubble doesn’t fit all of these signs.
And, of course, even if an asset is in bubble territory, it doesn’t mean that you can’t make money on it if you move fast and you get out before the bubble bursts. There have been plenty of people through the ages who have speculated on assets that were in a bubble and profited. Most regular joes, though
Most regular joes, though, end up with the short end of the stick. By the time they are clued in, the price is already high. The chance of selling at a profit before the bubble bursts is low.
So, Is There a Bitcoin Bubble?
Are we looking at a Bitcoin bubble right now? It’s hard to say. In some respects, it does appear that we could be in bubble territory. After all, the price has been skyrocketing and the buzz around Bitcoin continues to grow.
However, there was recently a major correction. On top of that, plenty of people are looking at the underpinnings of Bitcoin and asking hard questions. Plus, Bitcoin has yet to reach critical mass in the public’s wider consciousness.
The problem with trying to predict investments, and also trying to predict bubbles, is that we so often don’t recognize where things are going. And, even if you do see the bubble, you can’t predict exactly when it will burst.
Instead of just following the crowd and the hype, it makes sense to take a step back and think about your personal reasons for investing in an asset. Whether that asset is Bitcoin or anything else, it’s a good idea to think about what you plan to use the asset for.
Where does it fit in your portfolio? What would happen if the asset crashed? Would you be financially devastated? If so, maybe you need a little more diversity.
Whether something is in a bubble or not, the real key to long-term success is to know why you’re investing in something, and to have a plan for it — and purpose for it in your portfolio.