The viral cryptocurrency Bitcoin has made a name for itself in no time. Throughout 2017, the currency has seen a drastic rise in its value which was around $1,000 in January and crossed over $17,000 before falling just below $15,000.
Bitcoin is a bubble because it has no inherent value, and the price is determined solely by the balance between buying and selling. This statement is indisputable. The only problem is that one could, quite reasonably, also say this: Gold is a bubble because it has no inherent value, and the price is determined solely by the balance between buying and selling.
A lot of people, especially those who think that bitcoin is immune to the basic laws of human behavior just because it’s ‘tech’, don’t seem to appreciate this. The implementation of bitcoin, the revolutionary blockchain technology, the thrilling tale of a mystery creator whom no one knows (and who may never have existed), all that is great stuff and fits right into today’s world. In fact, there seems to be a belief that Satoshi Nakamoto was a time-traveler and bitcoin is a technology transfer.
Even so, the price of bitcoin is a different matter. The rise of bitcoin’s price is a perfect demonstration of how price gets determined in an open market, just as its collapse will be. The price rise indicates that compared to people willing to buy it, there are practically no sellers of bitcoin in the world today. The supply of bitcoin is also constrained by the mining process. A lot of people have taken to heart the fact that there is an inherent limit to the number of bitcoin that can be created enforced monitory policy.
And yet, the fact remains that the relentless price rise of bitcoins is untested in the kind of markets that other financial assets face. For example, there is no real way of shorting bitcoin today. The derivatives available as of now are on unregulated markets and not trustable. There are probably millions of people in the world who think bitcoin is going to crash soon but they have no way to trade on that opinion. This could change soon as a number of trustworthy exchanges are working to create coin derivatives.