Don't be fooled when you see a Bitcoin price prediction that calls for a collapse in the digital currency.
Those predictions are mostly based on the bursting of the Bitcoin bubble. Bitcoin prices soared 8,500% in 2013 only to fall 85% by this past January.
But the critics have misread what the charts are saying.
All they see is a long downtrend. It buttresses their belief that Bitcoin has no value and that its demise is inevitable.
But these critics miss several key points. The truth is, now that it's post-bubble, Bitcoin is finally finding its true value…
What Most Bitcoin Price Predictions Get Wrong
First, critics typically liken the Bitcoin bubble to the infamous Dutch Tulip Bulb Mania of 1634-1637.
In that case, imported tulip bulbs went from being a somewhat pricey luxury to a wildly speculative investment. Prices soared some 1,500% within a few months. When some started to cash out, the whole thing crashed. In less than a month, prices for the once-prized bulbs fell 99%.
Bitcoin, however, is not that kind of bubble. The tulip bulbs had little practical value; they were just pretty flowers.
Instead, the correct way to view the Bitcoin price trend is to look at the U.S. housing bubble…
From 1999 to 2006, U.S. home prices soared 80%. But housing was never worthless. Homes were simply overpriced.
When the housing bubble burst in 2005, prices started to slide back toward the long-term trend – the true value. By 2008, home prices were down 40% from the peak. But those prices were close to levels where they would have been if the bubble had never happened.
That's what's happening with the Bitcoin price. Bitcoin's price decline is similar to what happened to the U.S. housing market, not to Dutch tulips.
You see, Bitcoin – unlike a tulip bulb – has value.
As a digital currency, it can transmit money between any two parties anywhere in the world without the need for banks. And startups have only begun to explore the uses for the technology underpinning Bitcoin, the blockchain.
So what the Bitcoin price chart shows us is a price seeking its true value – like housing.
But that's not the only reason the Bitcoin bubble isn't as significant as most of its critics think.
This one, ironically, has to do with how the Bitcoin bubble was inflated…
wonder in a big downturn, maybe a currency bust, if bitcoin would be a "flight to safety"?
David,
That possibility becomes stronger every day as the Bitcoin ecosystem grows and adoption increases. Given the reckless printing of fiat currencies the world over, we won't have to wait long for a real-world test of your hypothesis.
Very insightful article, even if I am 5 months behind in finding it, well done. I'm still trying to find a website that will show how much global currency has been pooled into Bitcoins. Since inflation is a set rate and the last amount I had found was around 10 billion dollars had been invested into bitcoin since its creation – I see it as something that is here to stay. (Sort of like the internet… the best analogy I have heard to date.)
I think one of the biggest obstacles is attracting more attention of the average person (in first world countries).