Key facts:
The behavior of Bitcoin since its creation is far from the typical model of a bubble.
Bitcoin was not born as an investment vehicle, although it behaves like a financial asset.
Among the most cited arguments by bitcoin’s opponents, perhaps the most prominent is the one that associates this cryptocurrency with an economic bubble. But is Bitcoin really just another doomed financial phenomenon? Let’s review the arguments.
To begin with, we must know what an economic bubble is. According to the definition of various experts on the subject, bubbles are markets whose behavior begins with a sharp rise in price, followed by an equally sharp fall. In this way, those people who buy the assets of the market will see a precipitous increase in their capital, as well as subsequently suffer large losses.
The first economic bubble in history occurred in Holland in 1620, with the great popularity of tulips that were grown only in that country. In less than two decades, the great demand from all over Europe pushed up the prices of tulips to exorbitant levels. Once speculators started taking profits, demand dwindled and prices plummeted.
One of the first economic bubble models was proposed by the American economist, Hyman Minsky, in 1986. According to his study, he created a scheme that he called the 5 phases of a credit cycle, where he explained step by step how they form and vanish. these dangerous markets.
Minsky’s modelshown in the graph above, went almost unnoticed when it came to light, until it was applied in the following decade to the analysis of a major bubble: the crisis of subprime mortgages. This began with a growth in high-risk mortgage loans for home purchases in 2004 and 2005, stimulated by low interest rates. The debt could be bought and sold and was transferred through bonds to investment funds, since the risk rating agencies quantified the possibility of non-payment as very low.
Later it was determined that the probability of default was more than 200 times higher and when interest rates were increased from 1% to 4.5%, the bubble burst. This mortgage crisis has its climax in 2008, precisely the year in which bitcoin was born.
Namely, the Bitcoin network is the predecessor of the largest bubble experienced by the modern generation. A ghost that has haunted him, strengthening him as an alternative to traditional finance, but also generating terror in a population that does not want to risk their capital on technologies that they do not understand.
Possibly for this reason, and thanks to the meteoric rise in the value of bitcoin in the last decade, there are not a few who have branded cryptocurrency as the new bubble of our time. And although bitcoin cycles are usually associated with sudden increases and decreases in price, the reality is that the behavior pattern of BTC does not fit the definition of a bubble.
Or at least that is what two specialists consulted by CriptoNoticias think to delve into this topic. We spoke with Henkel García, financial analyst and director of Econometrics, and with cryptocurrency expert economist Aaron Olmos.
What the specialists say
For Henkel Garcia, it is not an easy task to determine whether or not bitcoin constitutes a bubble. “It is as difficult as knowing the preferences of those who actively participate in that market,” says the analyst.
We put to Garcia that the limited supply of 21 million Bitcoin has been presented as an argument that would go against the conception of bitcoin as a bubble. This is because it makes it a deflationary and scarce asset, therefore, increasingly valuable in the global economy.
The specialist disagrees with this concept. Garcia holds that bubbles have also appeared in assets whose currency is limited. “In fact, that relative scarcity powers the bubble. The case of tulips is a good example,” says the analyst.
For Henkel, beyond the possibility that bitcoin is a bubble or not, the risky behavior that its price can have in the invested capital is more worrying.
My point with BTC has always been its volatility, its price risk, beyond ensuring that it is a bubble.
Henkel García, director of Econometrics.
Even complementing the opinion of the Venezuelan economist, there are not a few who believe that it is very difficult to know if an asset is totally a bubble. Rather, all markets have bubble behavior at some point in their existencea postulate made by the Nobel Prize in Economics in 2013.
Robert Shiller claims In an interview told the newspaper El País that it would be wrong to assume that there are no bubbles in the market. “Yes, they are produced continuously. Almost all action in the aggregate value market is bubbles. In this sense, not even bitcoin would be spared from having behaviors typical of a bubble at certain times, like any other speculative vehicle.
Bitcoin was not conceived as an investment vehicle
For his part, cryptocurrency expert economist Aaron Olmos argues that bitcoin was not initially conceived as an investment vehicle. Therefore, it cannot be analyzed with the same tools applicable to traditional assets.. Because of this, it is very difficult to categorize it as a “bubble”.
As if that were not enough, Olmos points out that bitcoin enjoys growing acceptance as a means of payment and as a refuge asset, which gives robustness to its value among users.
Unlike an economic bubble that bursts because the increase in prices has no real elements to justify them, it has been 13 years since the creation of bitcoin, and it has historically shown that price corrections occur after a bull run. These cycles of rise and correction have been repeated, after trying to reach a price level that corresponds to the real situation of the market.
Aaron Olmos, Economist.
Although bitcoin was not created as an investment vehicle, this was becoming a financial asset at the initiative of companies and individuals who had an affinity with cryptocurrencyOlmos says.
As a financial asset, bitcoin was not assigned a single role, but is seen by some as a currency, while others consider it a speculative asset, and for many others it represents a store of value. That is, it has multiple ways of being valuable to its users.
On the other hand, there has been a growing acceptance of bitcoin as a means of payment, by individual companies and even government entities. The declaration of bitcoin as legal tender in El Salvador in June 2021 represented an important boost to the pioneering cryptocurrency, which has generated interest in other countries about the advisability of adopting similar measures.
Another of the unique qualities of bitcoin that protects it from market manipulation and the formation of economic bubbles is the availability of information on the blockchain. The data of transactions, issuance of new coins and even the volume of users is completely public, so it allows to form a set of parameters and indicators that allows evaluating the strength of the network.
Parameters such as the dynamics of the supply, the proportion of currencies in profit or loss, or the behavior of long-term and short-term investors, among many others, can be examined by investors, which would allow them to better adjust their investment strategies. investment.
Intentional movements of price manipulation and large speculation can be detected through the data of the block chain, a characteristic that traditional markets do not have and that other economic bubbles do not meet either. After all, speculation, manipulation and insider trading they usually occur under the veil of users’ ignorance, exactly in those markets with little transparency.
Taking these data into account and according to the opinion of the specialists, bitcoin doesn’t seem to fit the definition of a bubble economy, persisting with its price corrections and without experiencing a total collapse of its market as contemplated in the bubble models. However, there can be no assurance that the price will not follow the behavior of a bubble in the future or that the scenario of a price bubble is excluded from the future evolution of the market. A threat that is always latent in the stock markets.