Why it’s Wrong To say Bitcoin is a Bubble
Nov 06, 2017 Posted / 2804 Views
In Economics a bubble is a cycle characterised by rapid increase in the prices of assets followed by a collapse in the price. Bubble is created when the increase in the price is caused by factors which do not reflect the real value of the asset but rather predictive market Behavior making the prices of the commodity to rise beyond it's actual value. The most well known burbles that occurred includes the Housing Bubbles of 2008, Technology stocks Bubbles of 1999 and the Tulips Bubble of 1637. The price behavior of Bitcoin meets the Definition of Bubbles defined above. Before we draw a conclusion let's get the still unknown x needed to solve the equation, the value of Bitcoin. After determining the value of Bitcoin we can equate it to its price and draw a clear conclusion whether Bitcoin is a Bubble or not.
Still in economic science there are two major methods used to valuation of financial assets. Discounted cash flow derive the value of the asset from the current value of the future cash flow that the asset is expected to generate. The other method known as comparative Analysis calculates the value of the asset basing on the price of similar assets listed by competitors. But all these two Brilliant methods can not be used to calculate the value of Bitcoin. Bitcoin Investors Chris Burniske and Ari Paul have developed some models and metrics used for valuing crypto assets.
However their models use some underlying assumptions that do not actually affect prices of bitcoin and ignore major issues such use market rumours and predictions by prominent individuals and their effects on prices.
According to Aswath Damodaran, a professor of corporate finance and valuation at New York University, and Wall Street’s “dean of valuation,” Bitcoin is best considered as a currency and as such noe valuation applies to it. According to a publication on his website Professor Damodaran explains why he says Bitcoin should be taken as a currency.
The professor was quoted on a CNBC interview saying,
“ Bitcoin is not an asset but rather a currency and for that reason you can not value it or invest in it. You can only price it and trade it.”
so let's consider that the dean of Valuation at the wall street and New York University professor is correct on the definition of Bitcoin. This now means the price of Bitcoin is majorly determined by the forces of demand and supply of the currency. So at this point we can not tell whether the price of Bitcoin far exceeds its underlying value to make it a bubble.
From our explanation above, Bitcoin can not be taken as a Bubble since it's value can not be derived in anyway and it's future prices unknown. To determine whether Bitcoin is a bubble or not we have to consider more than the price of Bitcoin or what the experts say and the models used to value it. Lets consider if the action people are taking and the difference the number taking the actions and those not taking it. Bitcoin has just gained an average level of exposure to date with very many people still not having a single clue about it. However the Bulls of the Bitcoin market have increased in Number although their are still far many more Bears than the Bulls.
So it all windup to awareness and getting more investors to invest into Bitcoin so as the Believe on the cryptocurrency increase and the chance of terming it a Bubble diminishes.
Applancer is an open platform for discussion on all things like Blockchain , Cryptocurrency and Ico news updates. As such, the opinions expressed in this article are the author's own and do not necessarily reflect the view of Applancer .
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