Why debates about a bubble are often irrational?

These days, many self-proclaimed experts are taking the floor when it comes to cryptocurrencies. Often in this context, even the word bubble can be heard.

Many people think about Bitcoin these days, but not about technology companies like Apple. The 18,000% return did not only bring Bitcoin, but also Apple over the last 14 years. The perception in the media is currently quite distorted.

So it’s time to look at the development of cryptocurrencies in a neutral way and compare them. Professional investors like to protect their portfolio with gold. The same investors today complain about the trustworthiness and meaningfulness of Bitcoin. They both have one thing in common: they are only valuable because the majority sees it the same way. Of course Bitcoins become worthless if nobody shows interest in the cryptocurrency anymore. The same is true for gold: If the perception of gold changes, the price would crash. The industrial use of gold does not justify the high market price. Nevertheless, the raw material has long been valued as a “safe haven”. Bitcoin, however, is increasingly accepted as a mean of payment. If we say that Bitcoin is independent of politics – we are wrong. This is particularly evident in the news from China and Korea in recent weeks. Many governments are supplanting the digital currency or expressing specific prohibitions.


Advantages of a non-state currency

However, cryptocurrencies are a freedom unlike classic fiat currencies. Officially, central banks and politics are separate in democratic countries, yet the influence is unmistakable. However, no state has direct access to the properties of cryptocurrencies. This is a big plus in times of growing political instability and restrictions on liberties. Just how much a state guarantee is worth is shown by the example of Venezuela. The Bolivar is almost worthless, inflation has risen dramatically. Comparable terrible inflation experienced numerous countries in the past century, sometimes several times. A government currency is therefore in no case a guarantee for security.

At the same time, the money supply of Bitcoin is still low from an international perspective. We currently have a market capitalization of $ 200 billion or $ 0.2 trillion at Bitcoin. This is very small compared to the money supply of the two most important economies in the world, the US and the EU. Even all cryptocurrencies in circulation are around $ 0.5 trillion. The smallest amount of money, M1, comprising cash and sight deposits, is currently around $ 10 trillion in the euro area and $ 3.6 trillion in the United States. A comparison with the money stock M1 is inadequate, as it primarily captures cash. M2 also includes short-term savings products. A more appropriate measure, since many Bitcoin and other currencies meanwhile represent an investment instrument for investment. The money stock M2 for the two economic areas is 13 trillion (US) or 14 trillion US dollars (Europe).

So far, we are only talking about two, albeit large economic area. Entire Asian region is not even there. And that’s where digital currencies meet with much enthusiasm. The global money supply is a multiple of the market capitalization of all crypto currencies. In other words, there is still a room for growth.

Also, the Bitcoin is still no competition to the current currency trading volume – ie daily trading of fiat currency, also called FX trading. This number is about $ 6 trillion daily! Bitcoins are traded daily for around $ 1.5 billion. That’s still a lot, but not unimaginable.

Ultimately, the word bubble is hyped by the media, but not understood. American researcher Jean-Paul Rodrigue developed a theory  to describe blistering. Magazine Forbes already applied the model to Bitcoin in the winter of 2013 and describes the strong parallels. Since then, the price has increased more. Now, Financial Times argues on the basis of the same model for bubble formation.

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Categories: Crypto Currency

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