Policy Adviser at the Federal Reserve Bank of San Francisco, Joost van Der Burgt suggested that if Bitcoin is to be a bubble, then it should be at the beginning of the ‘profit-taking’ stage, adding that the panic isn’t here yet, but is coming.
According to van der Burgt, a look at history showed that the displacement phase of the bubble came in the years after the release of the Bitcoin white paper in October 2008. In the first days after Bitcoin was created, the concept of the cryptocurrency was just catching on. However, that didn’t happen overnight as the Bitcoin price didn’t trade above $100 until after five years.
He described the next phase as the ‘boom’ phase, adding that;
The subsequent ‘boom’ phase is characterized by prices rising slowly at first, but then gaining momentum as more and more participants enter the market, fearful of missing out.
In this boom stage, fear of missing out (FOMO) will see companies looking to capitalize on the growing industry and getting more involved with cryptos and the blockchain technology. He suggested that in some cases, the companies just add the word blockchain to their name as they look to draw more interest from investors.
The next step is the coming in of celebrities like Steven Seagal and Floyd Mayweather, who wanted to get a piece of the cryptocurrency action by endorsing some newly formed digital currencies. Unfortunately, these companies that have been endorsed by celebrities do not offer valid projects and have been exposed as frauds, leading to their shut down.
Van der Burgt continued by arguing that the supposed Bitcoin bubble entered the ‘euphoric’ stage, which he believes is similar to the period leading up to the 2008 financial crisis. He wrote that;
The euphoria phase is also when people start to borrow extensively to finance their investments. According to a recent survey, 18% of active bitcoin investors have financed their investments by credit card, and 22% of this group indicated that they have not yet paid off their credit card balance.
After the price of Bitcoin fell by more than 60% of its all-time high, van der Burgt suggested that the market is now entering the ‘profit-taking’ stage, a phase where so-called smart money begins to leave the market, leaving only one step left before the bubble pops. He added that;
The subsequent ‘panic’ phase, should it come to that, commences when reality sets in and bitcoin’s price would substantially crash.
However, van der Burgt admitted that he could be wrong with his analysis as most experts in the cryptocurrency world think, with the Bitcoin price expected to keep rising in value till it becomes very strong. He wrote that;
Then again, maybe Bitcoin is different than anything we have seen before, and maybe a decade from now its market capitalization will be sky-high as it attains the status of a new global currency.
Even though the rise of Bitcoin in some ways can be compared to a bubble, it is impossible to know if it is. One thing that people who attack Bitcoin fail to understand is that cryptocurrencies and their underlying technology, Blockchain have a lot of real-world applications, with van der Burgt admitting that Bitcoin could become a “new global currency”.