The Bitcoin Bubble

The past few months have been Bitcoin mania.

Bitcoin started the year under $1,000 per coin, and it recently flirted with the $20,000 mark.

I first bought some when it was under $5,000, I know several people who picked some up under $1,000. Pretty incredible gains! Too incredible I would say.

I’m no expert, but I write open source software for a living. Bitcoin is open source software. I understand blockchain technology from the 10,000 foot view.

My opinion, for what little it’s worth:

  1. This is definitely a bubble.
  2. That doesn’t mean the price is going down anytime soon.
  3. Even if the bubble pops, it doesn’t mean cryptocurrencies are worthless.

I still hold some Bitcoin today and I plan to invest in it again after the bubble pops.

I don’t believe it’s worthless, just overhyped and misunderstood.

For example, I was talking to my dad about Bitcoin the other day, and he had some misconceptions.

I tried to break down the concept in the simplest way possible for him.

Why is cryptocurrency so great?

  • It’s trustless. In an increasingly unscrupulous society, cryptocurrencies allow for transactions between 2 people who don’t trust each other.
  • It’s decentralized. We don’t need a bank or a trusted 3rd party to oversee the transactions.
  • Blockchain is the real magic. Even if Bitcoin fails, the technology it’s built on will still win.

Bitcoin and other currencies like Ethereum are awesome, but the blockchain technology that makes them work is what’s really exciting.

Blockchain

Blockchain is an open ledger, which means everyone sees all transactions. Think of it this way: If I buy $5,000 worth of Bitcoin from Chris, we write the transfer of coins from Chris to Scott in the public ledger. We send that to all of our friends, so everyone has a copy. If Chris later tries to say I only paid $4,000, or he tries to write fake transaction, we ask our friends what their ledger says. They will all confirm it says I bought $5,000 worth, so nothing can be faked. Because the ledger is public and distributed to everyone on the network, we don’t need to trust the other person. We just need to trust the code (which is also open source for all to see).

There’s also the concept of mining, which prevents spam and fake transactions, but we won’t get into that.

Problems

Bitcoin is far from perfect.

You can use Bitcoin to buy some items, like a Subway sandwich in Buenos Aires, or an Xbox game. However, it’s still fairly useless as an everyday currency. The common outlook today is that it’s more like gold. A store of value, not something you use to buy groceries.

There are some major problems with it, for example long transaction times. It can take over 6 hours and a huge amount of computing power (and electricity) to validate a single transaction if the volume is high.

It has a lot of flaws, but just like any software, it is constantly being improved. One thing I understand well is that software can be improved very quickly, which is one of the reasons I’m not too worried about the current issues.

Many people are investing in Bitcoin for it’s future potential, not it’s current state.

The Bubble

If we compare Bitcoin to the tech bubble of the late 90’s, then blockchain is like commerce on the internet. Everyone was excited about tech startups because of the promise of internet commerce, and this turned out to be the right sentiment. Some of the most profitable companies in the world today started as tech startups.

One of the factors in the 90’s tech bubble was too much hype too soon. People got dumb and greedy. They went all in on pets.com, when the real winners (like Facebook) hadn’t been discovered yet.

Even if Bitcoin turns out to be like pets.com, other cryptocurrencies built on blockchain technology are going to improve and thrive over time. The Facebook of crypto may not even be invented yet.

I think Bitcoin is in the same hype cycle as 90’s tech startups. People are investing just because the price is going up, not because they understand or believe in the technology.

The price of notoriously bad coins like Ripple (XRP) are skyrocketing just because people think it’s going to show up on Coinbase. That is speculation at it’s finest.

You’ll hear people value Bitcoin based on the market cap of gold, or some formula based on the number of people who own it. The real worth is determined by what someone will pay for it, and what that will be in a year is anybody’s guess. (As I write this that’s about $18,600, but by the time I’m done writing it could be at $16,000 or $20,000)

The price could continue to go up, but right now everything is going up. The stock market, employment rates, etc. The real test is when the economy gets in a tough spot, and investors are holding an asset that has not been through a recession (Bitcoin was invented in 2009).

People jumping into cryptocurrencies right now are fickle, and they’ll be the first to exit in signs of trouble. How far down it will go and when are the billion dollar questions.

At least, that’s how I see it. What do you think?

If you want to learn more about cryptocurrencies in depth, check out Ledger Status.


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Posted by Scott

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