When will the Bitcoin bubble burst?
Bitcoin is gaining followers and recognition, but not across the board. Thus, Bank of America wrote Bitcoin „blows the doors off prior bubbles“, taking a swipe at the leading cryptocurrency.
Michael Hartnett, the chief investment strategist of Bank of America found clear words on the current situation. According to him, a variety of indicators have created a „toxic brew in 2021“. The fact is that, according to the bank’s data, about $10 billion flowed into stocks last week, $29 billion into cash and $1.5 billion into gold. At the same time, Bitcoin Millionaire market capitalization increased by about $133 billion, and that’s clearly not palatable to the good people at Bank of America.
Although it is not clear how much money actually flowed into Bitcoin, it was certainly quite a lot. GrayScale alone reported in late December that about half a billion dollars a week found its way into Bitcoin.
The narrative of bitcoin as digital gold is working out
Investors have been pulling money out of gold and into bitcoin because the digital currency appears to be responding much more quickly to mass money printing. It is also increasingly being adopted as a portfolio diversifier even by large corporations after numerous studies concluded that Bitcoin increases risk-adjusted returns.
Instead of cash, BTC is now held as reserves, and that banks and governments do not like this is understandable from their point of view. Therefore, the blow to Bitcoin is not surprising, but it puts the current development in a wrong light.
Without a doubt, the parabolic rise in the Bitcoin price can quickly be perceived as a bubble. However, the term „bubble“ in the context of investments has a negative connotation among many. It implies that something is far above its actual value and has constructed a house of cards that can’t help but completely collapse at some point. But it’s not quite true that way, and I’ll explain why now.
Why a bubble is completely normal
Bitcoin is special for many reasons.
First and foremost, however, it is the launch of the digital currency that sets it apart from what we are used to.
Startups, like Facebook or Google once were, are closed to the public in their early stages by the force of the Securities Act of 1933. That means that at this stage, when there is rapid growth and value, the company is not publicly traded and therefore has no price whose movement we can all track.
It does, however, have a private price that is only available to well-heeled investors and banks. If this price were also publicly reported and constantly updated in real time through public trading, then it would quickly become clear that the price movements of such companies also look like a huge, massive bubble. Only when the company has completed its parabolic price increase in this growth phase do early investors realize their immense profits in the form of an Initial Public Offering (IPO) where they sell their shares to the public. This is how it was done with Facebook, Google and all other publicly traded companies.
So it’s not that Bitcoin is a bubble that will eventually burst and more or less disappear into nothingness. Rather, it is that for the first time we are witnessing the true, public pricing of an asset from the very beginning. We are in the phase where the true value of the underlying asset has yet to be found during its growth phase. This is no different than with all the startups out there, except in this case we are easily following along and even have the freedom to get in on the action.
Bitcoin was publicly thrown onto the open market with a starting price of $0. The market itself has decided that 1 BTC is currently worth around $40,000. No one else. The volatility, evident in parabolic price rises and harsh corrections, merely reflects the uncertainty of a free market about where to currently place the true value of the digital asset. After all, that’s not so easy either, because something like Bitcoin is unprecedented. So we lack accurate benchmarks to draw from. But a bubble that will eventually burst and disappear is not Bitcoin because of that. Quite the opposite, because it is an unprecedented opportunity for the „little man“ and the „little woman“ to be there from the beginning and also benefit from the parabolic growth of Bitcoin.