Is Bitcoin really in a bubble?

Many times I have been asked the exact same thing: “Is bitcoin in a bubble?”

My answer is always the same: “what makes you think that the price of bitcoin is in bubble?”

To which they usually respond that during the past few months the price of Bitcoin has risen a lot, at a much faster rate than any share in the stock market, and that for that reason the price has to be overinflated. Following this reasoning the natural conclusion was not to buy.

It’s funny that the first time I heard this was when Bitcoin was worth $1,000, just after a correction. Now, seeing a price of $16,000 per Bitcoin, should we label this a bubble? Or could we be in the same situation as last February and that see 1,000% increase?

The worst thing to do is look at the past evolution and say «as it has gone up a lot, now it will have to go down» or «the price of a bitcoin is already $11,000 that’s a lot of money». What you should do is understand that even though the market is unpredictable, subjective assessments can be made that suggest possible rises or falls in the medium / long term. Then you have to find a methodical and rational way to build that subjective opinion.

My reasoning is based on looking for references within the financial system that allow us to see in relative terms the size of Bitcoin. An important idea that some overlook is that the price of a unit of currency does not indicate anything at all. It shouldn’t matter too much if a cryptocurrency is worth 10 cents or $100,000, since this information is not useful if we ignore other variables. To make size evaluations you have to observe the market capitalization.

The market capitalization is the sum of the value of all the coins in circulation. For example, if we have 100 coins at $10 a unit, the market cap would be $1,000. With this, we can compare values ​​between different cryptocurrencies. Imagine that in the previous example there are only two coins in circulation of $100,000 each (total market cap = $ 200,000), but that there are 1,000,000,000 units in circulation from the first cryptocurrency at $0.1 ($100,000,000). That would mean that the currency that had a much lower price is actually worth 500 times more than the other.

Let’s compare the value of bitcoin with other companies or with other components within the financial system. Bitcoin capitalizes almost $200,000,000,000 a priori, which may seem a lot, but let’s compare it with the value of Apple. This company capitalizes around $900,000,000,000, that is, more than 4 times the value of bitcoin. This is when you have to do your subjective reasoning. Do you think that bitcoin is actually worth a quarter of what Apple is worth? This is when you have to inform yourself about Bitcoin’s value proposal and assess the impact it can have on the financial system and the benefits it can bring to society.

Another way to work this out would be to try to subjectively think how much of the global fiat currency (any currency officially accepted within a region) is going to be converted into Bitcoin. That is to say, if we believe that Bitcoin will be used as a major payment facilitator, it could be logical that 5% of the existing dollars (M2) get converted to Bitcoin. In which case, if the market cap of the dollar is $14,000 trillion this would mean that Bitcoin would reach a volume of $700 trillion, which would result in a price increase of more than 300%. This is only taking into account the dollar. There are many more currencies in the world that could convert part of its capitalisation to Bitcoin, thus generating a much greater impact on the price.

In conclusion, we all have to make our own conclusions about Bitcoin. Is it a worthwhile invest? Does it really add value to society? If we believe so, we can invest but invest wisely. The price of Bitcoin will continue to fluctuate. Unless you are a professional trader, we’d recommend playing a medium-long game when investing in Bitcoin, instead of getting into the short-term price changes and intraday trading.

 

Bernat Aguadé