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Is Bitcoin Really a Massive Bubble?

The digital currency bitcoin is up by more than 700% on this time last year and has passed the £4,700 mark. This hasn’t been without its ups and downs. In September, the value crashed from £3,600 to £2,600 in a week, causing panic. One thing I would say, having been investing in this currency for over two years now, is don’t panic - just hold on to them, or “hodl” them, as you will see posted all over the bitcoin community (but that’s another story). The continual rise of its value has made many financial market pundits question whether this sharp upward trend is actually the creation of an asset bubble.

The returns that bitcoin and other crypto currencies / crypto assets are experiencing have not been seen since the internet bubble in the late 1990s. However, bitcoin has very different fundamentals to early internet stocks and a very promising growth trajectory.

1. The Growing Acceptance of Bitcoin as Legal Tender

One of bitcoin’s biggest challenges is changing the perception of it as a black market currency caused by its decentralised nature and its unfortunate association with criminal activities carried out on the dark web.

Despite this, its “official” acceptance is on the rise.

In March 2017, Japan announced that it would officially begin accepting bitcoin as a legal payment method, which immediately boosted the price of the currency and has led to a substantial increase in merchant adoption across Japan.

Bitcoin: Japanese Landscape Japan now recognises bitcoin as legal tender

In the Philippines, citizens have been increasingly using the digital coinage to send and receive low-value amounts. This has not gone unnoticed by the country’s central bank, which announced in February 2017 that it will regulate bitcoin so that the currency can be used as an officially accepted payment system, thus granting it full legal status.

Countries such as Australia and Russia have recently made similar statements that could lead to bitcoin becoming a fully accepted medium of exchange in their respective countries. This is a trend that is likely to continue, given the growing demand for bitcoin as an investment as well as an online payment system.

2. More Shops Accept it as Payment

In the early years of the currency, merchant adoption was limited to a few brave ecommerce stores, usually run by early-stage bitcoin enthusiasts. This has changed substantially as leading tech companies and ecommerce platforms have chosen to accept it as a payment method. Microsoft, Rakuten and Overstock are three of the largest companies to accept bitcoin payments. I even use it to pay for my Huel shakes!

Bitcoin Purchase: Huel Starter Pack Huel Starter Pack, purchased for approximately 0.01 bitcoins

With the sharp price rally, increased media coverage and newfound acceptance in places such as Japan, bitcoin merchant adoption is on the rise and this trend will likely continue.

The arguments for online merchants to accept bitcoin are actually very strong; fees are lower than for credit card payments, chargeback fraud is entirely eliminated, new customers can be reached in underbanked regions and a new, tech-savvy consumer base can be attracted.

The more that merchant adoption increases globally, the more there will be regular and stable demand for the digital currency. 

3. People in Bad Economies are Storing Wealth in Bitcoin

Another reason why bitcoin is unlikely to be a bubble is that is has a much-needed real world application in economically distressed countries. In places such as Venezuela, Bolivia and Zimbabwe, for example, bitcoin has been acting as a store of wealth and as an alternative spending currency as local currencies are weakening into worthlessness. We see increasing bitcoin trading volumes that are negatively correlated with the performance of local currencies and economic growth in distressed regions.

Bitcoin also allows individuals and businesses in countries with strict capital controls, such as Venezuela, to receive much-needed payments to stay financially afloat. In other words, wherever there is economic distress, bitcoin demand will likely rise and bitcoin adoption will grow.

4. Bitcoin Has Only Just Gone Mainstream

It could be argued that 2017 has been the year in which bitcoin has finally gone mainstream. Five years ago, if you had asked the average person on the street what bitcoin was, they would probably have given you a bewildered look. Today, most people have at least heard of bitcoin and many even know that one bitcoin is worth more than an ounce of gold.

Now that bitcoin has become mainstream, the buying potential from new investors is immense, especially as institutional investors have started to open up to the idea of investing in bitcoin and other digital currencies.

5. Bitcoin’s Supply Is Limited

Finally, one of the key reasons that bitcoin has become so valuable is that its increasing demand is met with a fixed limited supply.

Because of the way bitcoin was created, only 21 million coins can ever be mined. Furthermore, the rate at which new coins are created slows down over time, which means the increasing demand for the digital currency is not only met with a limited total supply but also with a continuously slowing supply.

The discussion of whether bitcoin is a bubble will likely continue indefinitely, but the comparison between bitcoin and early internet stocks does not hold true due to the fundamental differences between the two asset classes.

6. The World's Largest Brokers are Investing in Bitcoin

Hargreaves Lansdown allows its customers to invest in bitcoin. The broker, which administers £70bn of investors’ money, will give its 876,000 customers access to a fund that tracks the price of bitcoin.

7. No One Really Knows. This is New, so be Careful

Not really a reason that bitcoin probably isn't a bubble, but I felt I should mention this. Billionaire investor Warren Buffett has joined the ranks of those who believe the market for bitcoin is in bubble territory. There are many who feel that way but the truth is that no one really knows. There are bitcoin loyalists and miners, and many who don’t understand how it is an asset.

In Conclusion

Given the reasons above, I don’t think bitcoin is a huge bubble. I think it is only just beginning as a currency. Admittedly, I'm not an expert, but even the experts are divided on this one.

I think the hard fork (relating to the mining process) in mid-November will shake the price up, but this is very complicated and I will write another post on that soon.

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