Bitcoin can be considered as the fastest-growing digital currency that allows people to make payments without using banks or other traditional payment methods. Bitcoin is stored in digital wallets which are online and can be sold or bought. Additionally, bitcoin has experienced tremendous growth in value. As at 2017 only, bitcoins price surged to 900% (Swartz 319). Currently, the most difficult question to understand is whether to use bitcoin as a currency or as a store of wealth. The paper analyses both sides of the question whether bitcoin is an economic bubble and concludes that bitcoin is not an economic bubble.
Many people argue that bitcoin is an economic bubble just like the dotcom bubble which occurred in 1995 (Swartz 319). Just like the internet, bitcoin is considered to experience growth in value over the years. However, the main fear is whether one day the value of bitcoin will experience a drop which will create massive losses in the long run. Bitcoins popularity has developed over a few years to become a precious asset in the world. It is necessary to look at factors that can result in growth in the value of the digital currency to understand the concept of economic bubble brought about by bitcoin. Numerous reasons can be used to show that bitcoin is not a bubble as discussed below;
First, bitcoin is backed by zero work of assets. However, currently, its valuation of about $11,000 qualifies the cryptocurrency as an economic bubble (Godsiff 192). It is thus logical to consider bitcoin as a bubble due to its valuation and the value of its assets. Currently, the rising value of bitcoin is driven by the increasing demand for the limited commodity. The rising value of bitcoin without asset base creates a suspicion among investors. It is essential to understand that the suspicious issue about bitcoin is created by the fact that the rising value is due to demand and supply of an asset less product.
Bitcoin is built on a free market currency which makes it volatile. Currently, economic experts agree bitcoin will continue to remain a hot asset (Kearns 45). Every person in the world is talking about it thus creating an interest in people to buy it. It, therefore, raises the price of bitcoin significantly due to the rising demand. However, investors fear to turn bitcoin into a financial currency just like the dollar. So, the question that remains is, what will happen when the rising demand starts to fall. The answer is a crash which will cause losses in millions of dollars around the world. However, it is important to admit that bitcoin is an interesting asset and thus should not be dismissed. It should be considered as an undeniably high valued asset in which any person can invest.
Bitcoin can be considered as an economic bubble because it has never existed before. It is essential to understand that bitcoin is inherently political as it is designed to a parallel money circulation system from the central bank. As a consequence, many economies around the world consider the currency as illegal. They do not allow the usage of the currency as they find it controversial. It is thus a risk to financial systems around the world which puts it at a risk of collapsing. Bitcoin thus faces the risk of rejection all over the world with time as governments change and their rules of currency and financials also change.
Also, bitcoin has flaws that may prevent the cryptocurrency from going mainstream. Just like any other technology, Bitcoin faces a high risk of manipulation from hackers. It is essential to understand that if a person steals a bitcoin from a website, it will be impossible to report the case and even get compensated. Bitcoin thus runs at a risk of causing losses among investors all over the world. Hackers can find ways of getting around the technology and identifying a weak point where they will manipulate the systems and cause massive damages.
Lastly, bitcoin has intuitional limits when thinking about investment within limits. If one thinks about investing in bitcoin, there a limit to which the risk cannot be taken. One can invest only to a limit where they feel comfortable just in case of losses (Quiggin 23). Many people reason that in case all the hype of the currency is swept up, the losses will be bearable. However, it will be highly risky to lose a large amount of money because of the currency. The limitation created by individuals due to the cryptocurrency thus makes the currency an economic bubble. It is important to look at the risks involved and also the issues likely to face bitcoin as a currency.
Even though bitcoin as a cryptocurrency is considered unstable, it is important to understand that the currency behaves exactly like the stock market. Its behavior in the market depends on the consumers. As much as it can be considered as an economic bubble, bitcoins behavior in the market depends largely on the consumers. Bitcoin thus has many advantages in the market which makes it a good form of currency.
First, the blockchain technology used to build bitcoin is considered as a secure technology that does not subdue hackers. As a consequence, the cryptocurrency can be considered as very secure and promising for the market. Bitcoin should thus not be considered as an economic bubble as it is not likely to be faced with issues of hacking. It is important to look at the areas where the currency can be secured rather than creating a currency that is feared by every person in the society.
Also, the bitcoin is considerably a stable investment in the world. The people who invested in bitcoin at its initial stages have experienced increased profits in the long run. Up to the present period, bitcoin has survived in the market for many years which makes it a currency that can be trusted (Iwamura 90). Bitcoin can thus be considered to be more than just an economic bubble but a cryptocurrency that will stabilize with time. It is crucial for the governmental institutions around the world to work on ensuring that it remains stable and also there is enough security provided.
I would recommend that the governments around the world should appreciate the existence of bitcoin rather than finding a way to wipe it out of the market. Bitcoins existence in the market means that the technological improvements around the world have experienced disruption which comes with growth in economies and also development of technology infrastructure. Also, the existing technology of blockchain that comes with the cryptocurrencies has created a secure and best way to prevent illegal transactions from occurring.
It is also recommended that the existence of bitcoin be made legal all over the world to prevent people from incurring losses in the long run. Additionally, it will also create avenues for developments and grow the markets further. Bitcoin is one of the best developments in the world. It should thus be treated as an interesting development which means it can be a good development to the world at large. Bitcoin should be treated as an interesting fact rather than a factor which will cause an economic bubble in the long run.
Bitcoin has brought increased excitement to the market which is an important factor when looking at developing markets which are good for economic growth. The technology is important due to its impact on the financial markets. The question whether bitcoin is an economic bubble or not is still debatable. However, to understand this problem, it will be necessary for investors and speculators to start treating bitcoin as a high-risk asset and speculative commodity. The price of bitcoin varies highly and depends on its demand in the market. The study has shown the rise of bitcoin and explained the issues facing the cryptocurrency and the issues it may encounter in the future. The question that currently exists is whether, in the future, the currency will be asset-backed or demand-backed. Bitcoin is not an economic a bubble but an important technology that will help in the future. It might bring positive effects to the world just like the dotcom bubble.
Godsiff, Philip. "Bitcoin: Bubble or Blockchain." Agent and Multi-Agent Systems: Technologies and Applications. Springer, Cham, 2015. 191-203.
Iwamura, Mitsuru, Yukinobu Kitamura, and Tsutomu Matsumoto. "Is Bitcoin the Only Cryptocurrency in the Town? Economics of Cryptocurrency and Friedrich A. Hayek." (2014).
Kearns, Jeff. "Greenspan says Bitcoin a Bubble without Intrinsic Currency Value." Bloomberg, December 4 (2013): 2013.
Quiggin, John. "The Bitcoin Bubble and a Bad Hypothesis." The National Interest (2013).
Swartz, Nicole D. "Bursting the Bitcoin bubble: The Case to Regulate Digital Currency as a Security or Commodity." Tul. J. Tech. & Intell. Prop. 17 (2014): 319.
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