Whether or whether Bitcoin is a safe investment has been a topic of debate ever since its birth, but especially since its meteoric rise to fame in 2017. One of the most frequent inquiries from newbies is whether or not Bitcoin is a bubble, as nobody wants to lose their life savings due to FOMO (Fear of Missing Out).
Is there a Bitcoin bubble?
A financial bubble is “an increase in asset prices that can’t be explained by its fundamentals,” as defined by Charles Kindleberger in his magnum opus “Manias, Panics, and Crashes: A History of Financial Crises.”
To sum up, a price or range of prices for an asset that significantly exceeds the item’s inherent value is indicative of a bubble in the economic market. Many instances of the classic bubble can be found in the annals of finance:
- Dutch Tulip Bulb Mania 1636-1637
- Company, Mississippi, 1719–1720
- Gold price bubble 1975-1982
- The years 1995–2001, which are known as the dotcom bubble.
- The US housing market bubble of the 2000s
The Bitcoin bubble(s)
In what way does Bitcoin represent a bubble? Until a bubble bursts and prices crash, it’s difficult to say for sure.
The fundamentals of bitcoin are clearly growing each year, thanks to the thousands of great open-source developers and contributors who are constantly striving to better the Bitcoin ecosystem. However, Bitcoin has had several speculative boom and bust cycles (Bitcoin bubbles) in the past, and it still has a long way to go before it is a stable currency.
Cryptocurrencies are distinctive from other asset classes in important ways. Bitcoin may be displaying tendencies of a bubble, but it has not yet entirely gone through, so answering the question “Is Bitcoin in a bubble?” is difficult. It’s possible that this asset class is still in its infancy and is expected to have periodic price bubbles as it develops.
That’s why the rule of thumb for anyone considering investing in bitcoin (BTC) is this: only put up money that you can afford to lose.
It’s important to keep in mind that bitcoin is the first scarce digital asset of its type, and as such is still mostly a social experiment. Don’t make irrational decisions out of fear of missing out, and don’t invest money you can’t afford to lose in the next bitcoin price bubble.
See our other tutorial titled “why do bitcoins have value?” for more information on this topic.