Bitcoin and the fate of other financial bubbles – Comparison and analysis

He announced the criteria by which it can be determined whether the assets are in the “financial bubble”.

According to his assessment, bitcoin, as a class of assets or currency, has potentially fatal flaws, according to which it can be considered that breaking the bitcoin bubble is a matter of time. A conversation about him should begin with the words “how sooner or later” there will be an explosion, and not “if”.

Nevertheless, blockchain as a technology providing cryptocurrencies has great potential and can bring significant benefits to investors in the future. Pay attention to projects other than cryptocurrencies that are built on this technology..

[Note: Investing in cryptocurrencies and tokens is a very speculative activity, since the market is largely unregulated. Anyone considering this field of investment should be prepared to lose assets.]

Do not consider that each Hofrichter criterion is applicable to any variant of assets, however, some of them definitely make sense when considering bitcoin.

The Thinking of the New Era

The phrase “Now everything is different” led to the fact that many assets are greatly revalued, and subsequently sharply adjusted. If digital currencies do not eventually become a “new era” and a breakthrough innovation, then this will lead to a strong price adjustment and its fall.

A similar situation arose with the technological bubble in 2000-2001, when regardless of the field of activity, any company that had the letter “i” in its name or used the Internet in its work grew rapidly. This was enough for investors to invest in such companies, which most of them eventually lost when the bubble burst..

Overtrading

Over the past five years, the volume of bitcoin has increased five-fold, which served as a similar rapid increase in the value of this asset. It looks like a typical bubble, which is formed with intensely upward price dynamics. It makes investors rush and “crowd”, and then the so-called “big fool” theory comes into effect (there will always be someone on the market who will push up the price). Unfortunately, when there is an active tendency to exit, the price may fall faster than a failed elevator.

Significant revaluation

It is not a fact that this criterion is advisable to apply for this case, but it is worth voicing anyway. The reason people are excited about investing in bitcoin is because it does not generate profits and income. Therefore, traditional assessment methods do not work here..

Bitcoin has the costs of creating (mining), however, they differ greatly depending on the place of production. Most other potential assets have an estimated indicator, and bitcoin does not seem to have one. Therefore, it cannot be said reasonably whether or not it is overrated.

Hofrichter on this occasion adds: “Has the hype around bitcoin really come to an end as one of the future world currencies? Probably not, as speculation around bitcoin and similar tools will continue for some time to come. Bitcoin has serious flaws: its trajectory strongly resembles a typical example of a bubble in the financial market. He lacks several key qualities that would qualify him as a currency. “.

Bitcoin bubble and its comparison with others

Hofrichter compared the prices of Bitcoin and 14 other assets, which showed serious price appreciation, and then sharply cheaper. He examined the situation with the stock exchanges, real estate and other markets at various intervals, such as the oil market in 1975-1985. (“Oil bubble” – the price of oil fell to $ 10 per barrel), the gold market – in 1975-1982. and “tulip mania” 1936-1937.