Will the Bitcoin bubble pop?
The hype around Bitcoin and other cryptocurrencies is showing no signs of slowing down - with more than three million people now estimated to be actively using digital currencies.
While Bitcoin is still considered king of the crypto space, it is only one of more than 1,000 others on the market, with the likes of Ethereum, Ripple and Litecoin quickly gaining popularity.
Critics have dismissed digital currencies as being too volatile; Bitcoin’s value surged from $600 in late 2016 to almost $20,000 a year later, only for it to fall back below the $6,000 mark. You get the picture.
Nouriel Roubini, the economist credited with predicting the 2008 global financial crisis, has described Bitcoin as “the mother of all bubbles” and insists that it’s destined for a crash. And he’s not alone.
Gavin Brown, senior lecturer in financial economics at Manchester Metropolitan University says that talk of bubbles is nothing new.
As well as an academic, Brown is also a chartered accountant and a founding director at Blockchain Capital, which is looking to potentially be the first regulated cryptocurrency hedge fund.
“It’s not really surprising that people look at something like Bitcoin and cryptocurrencies and say this is just another a bubble in a sequence of bubbles,” he told BusinessCloud.
“The whole concept of a bubble is that the value outstrips the fundamental value of what it actually should be.
“Some people talk about the housing property bubble in the UK, but actually even though we get natural corrections the overall trajectory of the market is still upwards.
“Just because something may or may not be a bubble doesn’t mean necessarily that we’re just going to see something suddenly explode and fall to nothing.
“My genuine viewpoint is that when you look inside these assets you look at their use cases. Granted, there’s a lot of stuff there with a question mark over it but there are also some incredibly powerful things.”
When Brown first moved into the sector approximately a year ago, one of the first things he was keen to explore was the factors that sparked the emergence of digital currencies.
“The reason cryptocurrencies came about, as I see it, is the financial crisis of 2007 to 2009,” he says.
“In the build-up to 2006 and in early 2007 we started to see a huge market correction. There are lots of things that caused this; some people said it was the bankers, complex derivatives, rating agencies being mismanaged and misinformed, and a failure of regulation.
“In my view it was a combination of all these things. But what this did is create a perfect storm where a potential academic by the name of Satoshi Nakamoto was able to release a paper in 2008 – just as Lehman Brothers was failing – to say ‘look, here’s an alternative’. The very first Bitcoin was then released in January 2009.
“As the financial crisis was starting to bite in 2007/8, what we started to see was governments re-purchasing their own securities to increase the money supply, which lowers interest rates and stimulates investment.
"The problem is that if a currency increases in supply, the price will fall. So you have the potential for your wealth to be undermined by the actions of politicians, central banks and regulators and that’s why something like Bitcoin is a fantastic draw.”
The number of Bitcoins in circulation has been pegged at 21 million and Brown says he prefers to leave predictions about the future of cryptocurrency to experts ‘way more qualified than myself’.
Despite being a supporter of the crypto ‘movement’, Brown believes the real story is the blockchain technology which underpins it.
“Cryptocurrency is important but it’s really only one aspect that sits on top of the paradigm shift that is blockchain,” he says.
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