The investing world is split by bitcoin bears and bulls arguing over whether or not the cryptocurrency is a bubble. Despite its volatility and the large amount of uncertainty surrounding the cryptocurrency, there are several important reasons as to why we won’t see a crash anytime soon.
It Doesn’t Fit the Definition
Simply put, bitcoin doesn’t fit the definition of a bubble. A bubble is a one-sided event in which a significant amount of money is poured into one investment, creating an unhealthy market. Even though a large sell-off has occurred, with another likely at some point, it doesn’t make it a bubble. Emerging markets, or assets classes, naturally have boom and bust cycles. There is no reason to think that bitcoin will be any different. However, just because there is a temporary bust doesn’t mean there is a total paradigm shift as you often see with “bubbles.”
Not Every Market is a Bubble
Gold has been called a bubble by some, but it has never burst. Its value is driven by inflation. If the comparisons between bitcoin and gold are as accurate as many believe, then bitcoin may follow the same path, but guided by Millennial investing habits. (As we’ve seen, Baby Boomers are more skeptical about bitcoin, whereas Millennials are very accepting of it.) It may be that bitcoin never “pops.”
Bitcoin has a Healthy Market
Bitcoin has a very loud and large audience claiming it’s a passing fad. Counterintuitively, this active yet negative conversation creates a healthy market. It means there are people buying and selling bitcoin. Both sides of the conversation exist, people are for and against it, and that is an indicator of a strong market. When the CME and CBOE contracts went live, there was a large influx of investors, which created a surge, followed by a fall. While the jump and dip were big, this pattern is common in volatile investments as they mature.
While bitcoin is being overbought due to the exuberant outlook from many investors and its rush to the market, it is not a bubble. It will experience its share of slips as it works its way to a more mature, stable environment, but when it falls, even if it is a large price drop, it should not be a “burst.” Eventually, it is reasonable to expect the bitcoin market to experience another rally, but it will likely have a more cautious attitude as it works its way higher.
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