The Achilles heel of Bitcoin – Is it a Bubble?

In our last two blogs, we discussed the Bitcoin technology, its working, and functioning. And in the last leg of this blog series, we shall focus on the suspicion of Bitcoin being a bubble. Let take a look at the Achilles heel of Bitcoin; learn why and how this technology is being lampooned by industry experts, technology experts, and renowned economists.

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Key challenges which served as an alarm bell

The decentralized system which happens to be the key attraction of Bitcoin technology suffers from a major disadvantage: there is no controlling authority and no one who can bear the responsibility of a possibly terrible economic loss in the future.

Though Satoshi claims that Bitcoin technology is decentralized but researchers have pointed out some centralized notions n the BTC ecosystem. For example, mining and web wallets exhibit some features of control & regulation.

Also, it is a well-known fact that BTC is limited to 21 million in supply which can be reached by 2140. So, its claim to be the futuristic currency replacing the contemporary is under inspection. Further, current transactions are also limited by 1MB in size.

Shifting from facts and projections to actual observances it would be clear why BTC came under the speculative radar.

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The rise of bubble speculations: Have we reached a cul-de-sac?

Moving into the second decade of its existence, the Bitcoin technology is something which has taken the world by surprise. The variation of the acceleration and deceleration of the prices of bitcoin can be surprising. It can be clearly evident from the following rise and fall, the price of bitcoin in the beginning of 2017 was $19, 783 and it ended with $13, 889. It’s interesting to note that new cryptocurrency (relatively) have gained and attracted the market and are coming as a strong competitor to the bitcoin. The latter (Ripple) reported a tenfold increase in the price in the yesteryear. And what is even more interesting is the fact that only a handful as low as a thousand people in the world own 40% of global bitcoin supply!

Also, if we talk about the transaction fee there’s an abnormality observed in the month of December 2017. Transaction fee rose to $25 and that was seriously unfeasible on the part of the small transaction which made it completely uneconomical for the customer/user to opt BTC for progressing transaction of small amounts. And in an incident which dates back to 2011, the value of 1 BTC rose rapidly from USD 0.30 to 32 before returning to USD 2.

A pre-modern definition of a bubble according to a dictionary of political economy, “any unsound undertaking accompanied by a high degree of speculation,” the alluring and attractiveness of BTC is collecting its users like a magnet attracts iron fillings, though industry experts call it Herding.

Experts Speak

Jeremy Grantham, co-founder of Boston-based investment management firm, GMO has this to say about the bitcoin, “This is a true, crazy mini-bubble of its own I expect.” It’s easily evident by his statement that he expects it to crash soon, “Historical analogy suggests this junior bubble, by size, may well crash and burn even before the broad market peaks.” However, this criticism is invited or absolutely called for because BTC now finds itself hard to stay above $15k while other cryptocurrencies have made a spurge, almost raising thirty-eight times their erstwhile values.

Besides Jeremy, Nobel laureate Robert Shiller also feels that Bitcoin might be a bubble like the tulip mania. He is reported to have said that BTC “exhibited many of the characteristics of a speculative bubble.”

Extending the argument further, the rise of speculations, it is estimated that if all the miners used modern facilities, the combined electricity consumption will be 166.7 MW (1.46 TW hrs/day); this poses a serious question when the world is already facing energy crisis. Where do we think we can make available this humungous amount of energy to feed the circulation of a currency which can turn out to be a bubble? Having shared our thoughts on the speculations of BTC after studying its market-behavior under the light of expert opinion, we can easily deduce that for the time being its sheen won’t be lost owing to its popularity and convenience of use. We just hope that Achilles’ heel gets healed by the time and we enter a different era of technological advancement.