Are cryptocurrencies a Bubble?
Are cryptocurrencies a Bubble? This is a question that we get asked quite often on our website and offices.
Therefore, we would like to take a look at the main definitions of a bubble.
Economists define a bubble when the price of a certain asset appreciates in value much faster than the supporting fundamental factors.
If one is interested in reading more about historic economic bubbles it is worth reading about the Dutch tulip mania or the us stock market bubble etc.
To give a simple example fundamental factors in the currency markets would be the European Central Bank stating that it feels the price of the Euro is over appreciated. Economist refer to this as a dovish view.
However, do such factors affect cryptocurrencies at all is the question we would like to ask?
Since Bitcoin (and cryptocurrencies in general) are a decentralized currency. What this means is that they are not under the monetary and fiscal control of any central bank.
Per design in the block chain technology every user “verifies” everyone else`s transactions. So it is impossible to counterfeit a cryptocurrency transaction.As such their value is purely determined by the economic laws of supply and demand.
Furthermore, unlike conventional currency (EUR, USD) etc. the supply of Bitcoin (as well as alternative coins) is limited.
There is no central bank to decide that inflation is too low and therefore supply needs to be increased.
This is why we believe that Bitcoin is not a bubble. Mainly because it does not fall under the same economic laws as traditional asset classes.
Additionally, this is also what makes it so interesting to investors. Along with the fact that it is still possible to “produce” this new asset class.