Is The Bitcoin Price Bubble Bursting?

Since its launch, bitcoin’s price has fueled divided and extreme reactions. To its believers, bitcoin heralds a wave of disruption in finance and its high price indicates that assessment. But skeptics claim that erratic price increases within the cryptocurrency ecosystem are a bubble that will soon burst. They point to the dotcom bubble at the turn of this century, when any company associated with the Internet made a killing on the stock market, as an example. 

Not surprisingly, the recent crash in valuations for cryptocurrencies has drawn a flurry of responses from both camps. Some claim this is the beginning of the end, others say this is a story we have seen before in 2014, and still others say this is a correction before another run-up in prices. (See also: Bitcoin Price Tanks: No Respite For Cryptocurrency Markets.) 

A Bubble That Will Deflate Further 

Capital Economics, a research consultancy, does not mince words in its latest note. “Claims that cryptocurrencies will replace established fiat currencies are rubbish,” the firm writes. “Our view is that Bitcoin is a bubble.”

According to Capital Economics, the latest fall in prices suggest that the bubble is bursting. “..although with prices still ten times higher than a year ago, they have a lot further to fall,” the note’s authors write. But a crash in prices for cryptocurrencies will have limited effects on the world economy because a very small percentage has invested in them. 

Back in 2013, bitcoin’s price reached a high of $1,137 at the end of November. The price concluded an astonishing increase of more than 1,000 percent in the cryptocurrency's price that year. In the next 17 days, however, its price had crashed by more than 50% to $533.70. By February 2014, it was down to $451.60.

Lionel Laurent, a columnist with Bloomberg Gadfly, points to this historical price precedent as proof that bitcoin prices will decline further. “As in 2013, there is a market of speculators looking to get fabulously wealthy, not of investors analyzing business models or cash flows. Fear of missing out is driving the boom and a rush to cash out the bust,” Laurent writes, predicting that an 80% drop may be on the cards for bitcoin’s price. (See also: Fraudulent Trading Drove Bitcoin's Price From $150 To $1000 In 2013: Paper.) 

Neil Wilson, senior markets analyst at ETX Capital, calls the crash “a tipping point for Bitcoin.” He is quoted in a Forbes post as saying that further trader pessimism about the cryptocurrency “could conceivably take us back to the narrow (for Bitcoin) range it traded at between 21 and 24 November, when it was bouncing around at just above $8,000.”

Or Maybe This Is A Correction? 

Others, however, prefer to varnish the decline in cryptocurrency markets with a coat of optimism about the future. In their worldview, the current drop in prices is a correction and a pause before growth later this year.

In an interview with Business Insider, Thomas Bertani, CEO of a cryptocurrency wallet Eidoo, said this was the hype cycle going back to normal. “The hypothesis of South Korea banning cryptocurrencies, more than a driving factor, is really just an excuse for the market to rest down a little bit before continuing with its continuous growth,” he said.

For Christopher Keshian, co-founder of $APEX Token Fund, bitcoin’s volatility is an “expected, and important, part of the journey to becoming a mature asset class.” “We expect the volatility to continue throughout 2018 but fundamentally believe that bitcoin is still in a bull market,” he told Fortune. 

Charles Hayter, CEO of cryptocurrency price comparison site Cryptocompare, attributed the crash in bitcoin’s price to “fast-moving weather systems in the crypto world." Hayer said: “One moment it’s absolute exuberance, and then it’s pure fear and panic, running for the exits.” 

There might be some truth to this comparison. Bitcoin’s price, which was struggling to break the $10,000 barrier Wednesday morning, has already crossed $11,000 and is steadily progressing towards $12,000, as of this writing. That means the cryptocurrency has traversed a 25.5% gain in its price within a single day. 

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.