The same talk of Bitcoin being in a bubble has been dogging it since late 2013, and many time before and after that. The talk remains today as Bitcoin continues to smash barrier leaving the pessimists asking: ‘When will we hear the pop?’
Yet, Bubble or not, Bitcoin seems unperturbed about the negative press, only focusing on the huge adoption and the increase in promising market conditions. It is, however, even on the upswings, a scary ride.
It is probably prudent to understand what would happen if there was a catastrophic failure and the Bitcoin market did pop like all the others it has been compared to.
Risk to the global economy
The obvious starting point would be to discuss what would happen to all those who invested loads of money into Bitcoin if it collapsed. That is simple though, they would lose money. It is more interesting to examine the effect on the global economy of this revolutionary monetary system.
In all honesty, if Bitcoin was wiped from the face of the earth, the global economy would barely even know it had gone. Bitcoin is minuscule in comparison to some of the other big market players out there. The residential real estate market is over 500 times bigger than the Bitcoin one.
Comparing the cryptocurrency market cap and the money involved – just over $350 bln – to the money that was in the dotcom bubble, it is nearly negligible.
Adrian Lee, a senior lecturer in finance at the University of Technology in Sydney, explains in an Australian example:
“So, it wouldn’t affect the Australian dollar I’d say because nobody really uses it at the moment. If you think about it, there’s trillions of trading in the Australian dollar whereas Bitcoin is at most worth $200 bln at total, so it’s hardly anything compared to the trillions in foreign exchange.”
Additionally, lessons seemed to have been learned in the property market bust of 2008, or it may be that Bitcoin is a different asset, but it is unlikely that there is much borrowing going on to buy Bitcoin.
RMIT Professor of Economics Jason Potts adds:
“There’s very little evidence of anyone borrowing money to buy cryptocurrency and if I was a bank or a lender, there’s no way I would loan out money to do that.”
Could it be the spark?
Bitcoin’s bigger scope of effect, even for the naysayers, is not that grand. Many are calling Bitcoin a bubble because of its size, and the speed of its adoption. But as expressed earlier, Bitcoin is tint, and it is still in the early adoption phase.
Potts goes on the explain why Bitcoin collapsing would not even scratch any of the global markets or lead to a bleed which would have damaging repercussions. At the same time, he is essentially confirming Bitcoin is too small, and too young, to be a bubble.
Potts uses the analogy of Bitcoin being like email in 1994, indicating its early adoption phase, he then goes on to explain: “The sort of people who would hold superannuation funds … they’re not in this market and might not be for some time,” he said.
That would limit the fallout to the wider economy in a worst-case scenario. “If it crashed, it would only largely be those people who speculate on it, maybe people who use Bitcoin and maybe the exchanges may lose money. But then again the exchanges don’t require much overhead to run it, so if it fell they’d still be Okay,” Mr. Lee chimed in.
Bubbles are for big boys
Thus, it seems clear that because Bitcoin collapsing cannot have any effect on the global market, it is too small to even collapse. The effect of Bitcoin’s demise would only affect those who have sunk money into it – a bit like a business venture. But when a business venture fails, it is not seen as a bubble, pop; it is something different.
Perhaps the talk of bubbles needs to be left for now, while Bitcoin tries to catch up to markets that have, and can, pop, like the real estate market. That is not to say Bitcoin can’t collapse – but can it pop, not likely.