Bitcoin is on a tear in the past few weeks, breaking all time high prices left and right. But like any successful stock, asset, or currency, some experts think the cryptocurrency could be rapidly inflating into a bubble — that eventually, is going to have to pop.
Bitcoin rose to over $3,500 Tuesday. After a small dip Wednesday, it pushed even higher on Thursday, to above $3,550. The fear is that the higher bitcoin goes, the more likely it is to burst its bubble, as early investors start to cash out and nobody else can afford to buy in.
The popular criticism of cryptocurrencies based on the blockchain — a permanent public record of transactions that gives value to a finite supply of digital currency — is that they aren’t based on any tangible measure of value.
“It’s just created new value out of nowhere,” Rob Moffat, a partner at Balderton Capital, a London-based venture capital firm who focuses on fintech, told Reuters. “There’s no fundamentals behind any of this - it’s all based on public perception, so you can start to see some really strange phenomena.”
The counterpoint to this is that traditional currencies — or “fiat money,” as bitcoin advocates call them — do something similar in creating previously nonexistent value. There’s nothing that says a dollar bill is worth anything except for the trust everyday citizens place in the U.S. government to make it worth something. Bitcoin advocates say their currency’s decentralized, democratic system makes cryptocurrencies just as valuable as dollars and cents.
Moffat’s traditionalist line is that eventually bitcoin investors will start to pull their support for bitcoin and cash out into traditional currencies while the prices are high. Bitcoin believers and advocates, or “bulls” in financial speak, think the ceiling is nearly limitless for a decentralized system of money.
“The idea of this thing being a bubble is silly,” Miguel Vias, an executive at Ripple, the third-biggest cryptocurrency, told Reuters. “We’re in the bottom of the first innings.”
It’s difficult then, to say when the bubble will burst, or if it will burst. Part of the cryptocurrency’s recent spike is due to how well it weathered a series of challenges in late July. Despite the open-source, decentralized notion of bitcoin, the cryptocurrency was able to both avoid a destabilizing hard fork and gracefully accept a spin-off currency without diminishing its value, while simultaneously locking in a software fix to improve its transaction speeds.
Still, the value of any cryptocurrency is subject to a bunch of factors, and that can make it highly volatile. Investing heavily in any one asset is a gamble, and for bitcoin-rich investors, there are only 3 choices: buy, sell, or wait around and see what happens.