Bitcoin Bubble: Definition and What Investors Need to Know

Some investors claim that Bitcoingenerally speaking, is a bubble.

Financial bubbles can be found throughout history – with tulips in the 17th century and internet stocks in the late 90s. They are often seen only in retrospect. Until one emerges, it is difficult to distinguish a bubble from businesses that are merely ephemeral or growing rapidly. Bitcoin is undeniably volatile: Along with many bull runs, Bitcoin has had several sharp price drops, such as the dramatic fall from $70,000 in late 2021 to $19,000 in October 2022.

Prominent leaders in finance are also divided on the long-term viability of Bitcoin as an investment. Some have doubts about the underlying value of cryptocurrencythat don’t have assets or generate revenue like a traditional company, while others are bullish on Bitcoin’s future.

Warren Buffett. At Berkshire Hathaway’s 2022 annual shareholder meeting, Buffett, the company’s longtime CEO and one of the richest people in the world, said he would not buy all the Bitcoin in the world for $25. “What was I going to do with it?” he asked. “I’ll have to sell it back to you somehow.”

At the heart of his criticism is the fact that Bitcoin does not generate income for its owners – unlike, say, a company that sells products or services. While it is possible for something to be valuable without producing value in the traditional sense, such as paintings, he said those situations are rare and do not apply to Bitcoin. Instead of generating value, he said the cryptocurrency “depends on the next guy paying you more.”

Jamie Dimon. The JPMorgan Chase chief told Congress in September 2022 that he was a “huge skeptic” of cryptocurrencies, including Bitcoin — a view he has held for years. “They are decentralized Ponzi schemes,” he said. “The notion that they’re good for somebody is unbelievable.”

His doubts about cryptocurrency, he said, did not extend to stable coins: “There would be nothing wrong with a stablecoin, properly regulated.”

Jack Dorsey. As founder of Twitter and CEO of Block — the parent company of Cash App and The squarewith a name that is a play on blockchain — Dorsey has a long track record in technology and finance. “I don’t think there’s anything more important in my life to work on” than Bitcoin, he said at a Bitcoin conference in 2021. Bitcoin, in particular, stands out against all other cryptocurrencies, he said: “All the other coins, because me, doesn’t pay attention at all.”

Marc Andreessen. The tech entrepreneur who invented the first modern web browser, and later backed companies like Airbnb, Facebook and Slack as a billionaire venture capitalist, has been bullish on Bitcoin for years. His investment company, Andreessen Horowitz, invests in dozens of crypto-related projects, including Coin base.

In his 2014 New York Times op-ed “Why Bitcoin Matters,” Andreessen wrote: “Far from just a libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunities to rethink how the financial system can and should work in the Internet -era.”

It’s hard to say — in part because it’s hard to determine Bitcoin’s true value. Two factors make it particularly difficult to value Bitcoin.

• Bitcoin has a short track record. New companies can be volatile, so prices are subject to rapid and dramatic changes as the market determines its fair price. These sudden U-turns can give the impression of bubbles forming and popping.

• Bitcoin is fundamentally different. Investors have methods to assess the value of a company, including new ones. But these approaches do not work with cryptocurrencies. Bitcoin is not a company and does not generate revenue – an important factor in determining a company’s value.

For most of 2022, prices have fallen during crypto winter. However, experts disagree on whether this is a temporary setback or the beginning of the end. Simultaneous, Regulators increase scrutiny of crypto, which may indicate that it is becoming more integrated into the country’s financial system. In addition, some traditional financial companies, including Fidelity, Visa and MasterCardworking to bring Bitcoin into the mainstream.

If you want to invest in crypto but are concerned about the potential downside, it’s a good idea to limit your exposure. As a rule of thumb, don’t invest more than 10% of your total holdings in risky assets like crypto. This way, you can take advantage of the best-case scenarios while reducing losses if prices fall.