Bitcoin Bubble Analysis

March 7, 2021
Kevin Larkin

Perhaps the largest trend in fintech from last year into this year is the rapid increase in interest in cryptocurrencies, but bitcoin specifically. More and more companies are releasing statements on how they plan to treat cryptocurrencies in the near future as there is demand to use it during transactions with merchants. One of the biggest issues with this is just how volatile bitcoin is compared to most other already circulated currencies, making it hard to pinpoint its exact value from day to day. On top of this, due to how many more people are buying bitcoin, there is speculation that a bubble is forming which will burst eventually. Although cryptos are relatively new, there are experts who have been invested since the start and have been carefully analyzing its activity. Bitcoin appears to actually be more than an investment, as it has been able to compete on par with multiple government regulated currencies in free market scenarios. There are many current misconceptions going around involving its economy, valuation, and utility, which through research are hoping to be proven correct.

One of the biggest controversies that has always surrounded bitcoin is that its valuation is very difficult to pin down from day to day, but further research may provide a more concrete answer. Some of the most recent thinking suggests that an increase in the amount of available cryptos coupled with increased interest from the general public and rise of trading has resulted in many inexperienced investors joining in the hype. After all, digital currencies are computer code and fiat currency, meaning their price is mainly determined by the market and not backed by any real assets. This also means that the amount circulating and available can be more finely tuned than traditional currencies controlled by the central bank, as new currency can be released on a timely schedule and the amount of code generated and dispersed. The fact that cryptos are also mostly not distributed through the central bank may be working towards its benefit, as instead it’s processed by thousands of computers. Not being a part of the central bank may actually be working in its favor, but this may not be entirely true as China has seen success distributing their crypto the digital yuan.

The news that bitcoin’s asset price is determined by the parameters of its code and not just the market provides a new way to view and compare digital currencies as they become more mainstream when compared to traditional currencies.

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