US$800 to more than US$18,000 in less than a year. Many asking if it is a bubble or is this high price here to stay, one thing today is for sure is its still spiking in value.
What is a ‘Bubble?
A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.Investment mogul Jack Bogle says there is nothing to support Bitcoin, and the head of JP MorganChase, Jamie Dimon has called it a fraud “worse than tulip bulbs”.
Like any asset, Bitcoin has some fundamental value, even if only a hope value, or a value arising from scarcity. So there are reasons to hold it. But resent research shows that it is experiencing a bubble right now.
How do Bubbles occur?
Bubbles form in economies, securities, stock markets and business sectors because of a change in investor behavior, the dot-com boom in the late 1990s and early 2000s. saw investors buying tech stocks at high prices, believing they could sell them at a higher price until confidence was lost and a large market correction, or crash, occurred. Bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved again, causing prices to deflate.
What is not yet available is an accurate advanced warning bubble indicator. In its absence, a very cautious approach may be the best. Unfortunately, we cannot use caution to determine the extent of the bubble. There is no well-accepted model that suggests a “fair” value for Bitcoin. But whatever that level is, it is almost certain that, at present, it is well below where we are now.