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Why the Bitcoin bubble will never pop

At least, not anywhere in the near future. Yes, this might sound controversial. And yes, there are good sources explaining why Bitcoin is a bubble and how it has to pop. But I’d like to challenge this. Not to say that you should invest all your money in Bitcoin (I’d like to, but I don’t want to be chased by the AFM;). Also, Bitcoin will know big volatility. But, there are good arguments to make to highlight the other side of the discussion: why this might be a bubble that never pops.

Blockchain Bitcoin Netherlands

“A bubble occurs when investors put so much demand on a stock that they drive the price beyond any rational reflection of its actual worth”

 

“A bubble occurs when investors put so much demand on a stock that they drive the price beyond any rational reflection of its actual worth, which should be determined by the performance of the underlying company.” (investopedia.com)

This definition has a few problems relating it to Bitcoin.

Bitcoin doesn’t have an underlying company nor a definition of ‘actual worth’, since there was no equivalent to compare it to before. Also, other than stocks, Bitcoin’s internal performance stays the same over each year. We cannot look at Bitcoin’s price to earnings (P/E) or price to book (P/B). Therefore, to assess if Bitcoin is undervalued or overvalued, is rather subjective.

However, indeed, the increasing demand drives up the price.

So, where does the demand come from? Hard to define, but partially belief, partially actual use, partially kept as digital gold and supposably a big part as speculation. Yes, I see why you might think that the latter again points at a bubble, as we’ve seen before. But I’d argue that:

This time it’s different. The demand is rising, the supply is not.

Sounds like basic economics? True, but really I’ll explain why this is important to understand the analysis I’m trying to make.

First of all, Bitcoin is scarce, meaning there can only be 21 million bitcoins ever. While writing this article, we’re already approaching the 17 million.
Of the Bitcoins mined so far, it is estimated that ≈25% to 30% have been lost for good.
A big part of the network is ‘sleeping’, meaning that people holding Bitcoins haven’t spend from their (cold/hot) wallets for a long time.

At the same time:

Bitcoin is gaining more attention still, every day, and it is said that Bitcoin is still in the ‘early adopters phase’.
Institutional investors are just looking to get in.
As the fiat currencies as we know it are subject to inflation and/or devaluations, Bitcoin is considered an alternative store of value.
Bitcoin is the only ‘proven’ solution in the blockchain industry (please challenge me on this if you’d say otherwise).

Let’s summarise this.

While the supply is scarce and the possibilities of Bitcoin are just being discovered, the demand keeps rising every day. Simultaneously, the Bitcoin bought is often held by people as a store of value. 1+1: I don’t see this bubble pop very fast in the near future. If you’re still hesitant and asking, ‘but what if those people want to sell their store of value?’

Well…

Bitcoin blockchain

Nathalie Drost
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