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Will the Bitcoin bubble burst?

Will the bitcoin bubble burst?

In case you missed it, Bitcoin has gone bonkers. Last week the cryptocurrency smashed through $11,000 per coin—up $1,000 in 24 hours and up more than 900% since the start of 2017. To put this in perspective, in 2013, one bitcoin was worth $12. As of this post, it’s worth more than $10,000. Its market valuation is currently greater than that of BP oil.

According to The Washington Post, Chicago-based CME Group (the world's most diverse derivatives marketplace) is expected to launch a contract for Bitcoin futures next month. The Nasdaq Stock Market will start a Bitcoin futures site on its commodities trading platform in 2018. And people like Marc Andreessen, the well-known venture capitalist, have predicted that Bitcoin could become the scaffolding of the entire economy.

But what does this all mean? Is Bitcoin a new asset class worthy of investment, or is the current boom a speculative phenomenon on the brink of bust?

At the moment, Bitcoin is little more than a confusing, cumbersome to use, and highly volatile currency that the vast majority of us don’t understand. And it has hardly transformed the economy. Nonetheless, its valuation has reached an extraordinary height, whether by virtue of venture capital investment, its perceived equivalence to gold, its role in the “initial coin offering” market (see this article for an explanation), or just a speculative frenzy.

MIT Sloan Assistant Professor Christian Catalini has studied Bitcoin closely. "Bitcoin is maturing, and interest from institutional investors is growing,” he told The Washington Post. “There is a lot of enthusiasm, but part of it is likely driven by hype. One should be worried about that. Guessing the timing [of a crash] will be extremely difficult, but it's clear that when it moves so quickly over such a short period of time, there may be a separation between the value the network is able to deliver and what people think it's delivering."

Diversify your crypto portfolio

Just as digital technology continues to produce both winners and losers, not every blockchain product will be a great investment. As strange as it may seem to call a currency a bubble, the very loud pop you may soon here will likely prove the point. The next generation of money is sure to challenge our understanding of all sorts of things.

“You could imagine that in the future there might be a cryptocurrency that is mostly a store of value, like gold,” Catalini explained recently to The Atlantic. “It would be decentralized, and robust, but with high transaction fees. I might use it to buy a house, but not a coffee. On the other hand, others might be more useful for smaller payments. With digital tech, maybe we can have many different kinds of currencies, which altogether unbundle store of value from medium of exchange.”

If you want to get in on the excitement and are considering investing in the cryptocurrency market, you can learn more here about diversifying your portfolio across other types of blockchain technologies, like Ethereum.

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