OPINION: Is Bitcoin in a Bubble?

FinTech, Investing, News | May 5, 2017 By:

Is bitcoin in a bubble?  Historically, there have been great fluctuations in bitcoin’s price, but the recent boom seems to be akin to the “irrational exuberance” once touted by Alan Greenspan.

Bitcoin has generated over USD $1 billion in trading volume in the entire bitcoin system over the last 24 hours, and some observers believe the worldwide interest in the cryptocurrency markets is what’s driving the current surge. This week has seen bitcoin hit several all-time price highs just in the first five days of May, with single-unit prices on various exchanges mostly in the $1,500 range.

One of the indicators that things are getting crazy may be the interest in the mainstream. Suddenly, Joe Average citizen is talking about bitcoin and cryptocurrency, and while he may not be investing heavily in it, the temptation will be there if the price surge continues.

But does that constitute a bubble?  Author Michael Pento, in an article on the financial newsletter The Market Oracle, identified three classic metrics to determine whether an asset has grown into a bubble. Pento claims it becomes extremely over-supplied, over-owned, and overpriced compared to historical norms.

Using that criteria, many who work in the field claim that there’s no bubble. Granted, they have a vested interest in getting more money into the market, but there’s a compelling logic to their arguments.

“The digital asset market, now pushing past $44 billion — double where it was just three months ago — is definitely in a bull market,” said Michael Terpin, founder of Transform Group, chairman of BitAngels, and producer of the CoinAgenda cryptocurrency investing conferences. “Irrational exuberance can only be identified in hindsight.  Indeed, the original Alan Greenspan phrase in 1996 was at the relative start of the tech and dot-com bull market that would grow much larger in the following three years.”

LARGELY NEW MONEY

Terpin claims the current bitcoin boom “is largely new money coming in from the sidelines, so it’s a real bull market, not just the same funds being shuffled around. The fact that 99 percent of investors don’t even realize this boom is taking place bodes well for its continuing growth, even if certain of the individual token valuations will fall back down to earth.  Bitcoin, ethereum, Ripple, Dash and Litecoin, as well as a handful of rising stars, seem to have little selling pressure at this point and a continuing record of stellar returns.”

Tyler Drew, a real estate investor and cryptocurrency trader on Poloniex and Bitfinex with High Altitude Investing, says that bitcoin is “far from bubble territory” when seen in the lens of larger markets like real estate or the Dow Industrials. He says bitcoin is not in a bubble, but in “a nice corridor going up.”

“I always tell investors in crypto that it’s easy to get tunnel vision in all of this, especially with everyone in the space hyping that a single Satoshi could equal a dollar someday,” Drew said. “But in the grand scheme of investments, bitcoin is the largest cryptocurrency fish in a huge pond filled with whales. In the real estate world, bitcoin just hit the market cap rate of a small Real Estate Investment Trust, and there are hundreds out there.”

Drew says if the price goes outside of this area and tops $3,000 or so by summer, “then it’s safe to say it’s in bubble territory and due for a correction.”

He makes one other important point: “My relatives, my friends, and my real estate business partners have no idea what bitcoin is. Or, if they do, they certainly do not invest in the coin.  Of my 200+ Facebook friends, only two know what cryptocurrency is all about.”

One other nay-sayer on the potential bubble weighed in. Alan Friedland, founder and CEO of Compcoin, a token that provides access to trading software, says “As long as bitcoin can scale efficiently, we believe it’s rapid growth will continue for another year or two, or at least until digital use-tokens see wide-ranging success.”

So there you have it. Bitcoin prices may be up, but bitcoin does not meet the Pento standards of extremely over-supplied, over-owned, and overpriced compared to historical norms. At least, not yet.

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