Bitcoin is Hitting New Highs — Here’s Why it Might Not be a Bubble

Bitcoin is hitting new highs—here’s why it might not be a bubble
Bitcoin is hitting new highs—here’s why it might not be a bubble

In early September, one Bitcoin was worth almost $5,000. Then the Chinese government cracked down on cryptocurrency investments, and Bitcoin’s value plunged 40 percent in a matter of days, reaching a low below $3,000.

But Bitcoin bounced back. By early November, one Bitcoin was worth almost $8,000. Then last week, a controversial effort to expand the Bitcoin network’s capacity failed. Within days, Bitcoin’s price had plunged 25 percent, while the value of a rival network called Bitcoin Cash doubled.

Today, Bitcoin has recovered all of last week’s losses—one Bitcoin is now worth more than $7,800.

Bitcoin’s recoveries haven’t been very surprising to long-time Bitcoin watchers. Over and over again, Bitcoin’s value has seen spectacular plunges only to recover the lost ground and rise to new heights. Bitcoin has seen at least three major Bitcoin “bubbles” over its seven-year life.

Each time, a huge price gain was followed by a spectacular crash, leading many people to declare that the currency had been nothing more than a bubble. Each time, the currency has defied critics, regaining the previous highs and then pushing still higher.

Today’s Bitcoin price might represent a bubble, in retrospect. But it’s past time to acknowledge that Bitcoin isn’t only a bubble.

Lots of prominent people think otherwise, of course. JPMorgan Chase’s CEO labeled the currency a “fraud” in September. That sentiment has been prominently echoed abroad. “I just don’t believe in this bitcoin thing,” Saudi Arabia’s Prince Alwaleed said. “I think it’s just going to implode one day. I think this is Enron in the making.”

But here’s the thing: people have been predicting Bitcoin’s impending demise for years, and they’ve consistently been wrong. Even if Bitcoin were to lose 90 percent of its value in the coming weeks, it would still be worth around $800—a value many people dismissed as an absurd bubble four years ago. If it lost 99 percent of its value, it would be worth $80—a value that would have been considered absurdly high less than five years ago.

Blockchains are an important new technology, and cryptocurrencies are a fundamentally new asset class. Bitcoin, the most popular cryptocurrency, might be overvalued right now, but it might not be. Either way, it certainly isn’t going to suffer an Enron-style collapse.

Read more…