Is it a legitimate concern?
Since February of this year, bitcoin’s price has increased four fold and Ether’s price has increased ten times over the course of last year. So, it is a legitimate concern that such an increase can only result in a bubble.
But in my opinion, cryptocurrency is not a bubble at all. While it is extremely volatile and prices can drop like in July this year when $1000 loss was witnessed in the bitcoin price, bitcoin doesn’t operate like a fiat currency and thus it will never face a bubble burst like the conventional monetary system.
The reason is that it is not based on debt and new coins are only created through mining. The conventional currencies fail at one point or another because they are designed to have continuous deflation of the fiat currency. For example, a dollar is guaranteed to be devalued over the course of several years. If a milk carton costs two dollars, it will cost more in the coming years because that is certain in the designed economic system.
Money is created only through debt and since the debt has to be paid back, more money is needed to fulfill these requirements. This shows the inherent corruption of the system and that’s why after a cycle, it always fails. We are still reeling from the aftershocks of the 2008 crash and still a majority of the world is stuck with an economic system that is shady, imbalanced and rigged.
The rigging is due to the governmental control, corruption, easily preyed upon system. It controls the liquidity, the inflation rate, the interest rate and thus thus the system cannot be fixed with a centralized approach.
This is one aspect in which cryptocurrencies are taking over as the currencies of the future. The liquidity, price, inflation, data and other parameters of the currency are not being controlled by anyone at all. Their system ensures anonymity and peer-to-peer transfer, something that is not possible at all under the fiat currency banking system. The anonymity part is where fiat currencies actually struck gold as it offers something to the public that has never been done before.
Economists and cryptocurrency bubble
Economists often argue that the reason why the bitcoin “bubble” is going to crash is because it has nothing behind it to support it. Fiat currencies normally bank on national wealth, resources, outreach, trade and even military power to support the value of the paper currency that they are floating in the market.
Now altcoins have none of that. They have no gold storage units, they have no trillions of dollar of tax revenues, they don’t have the government’s immense holdings around the country and they certainly don’t have any physical infrastructure in most cases.
So why should they command such high value at all?
The reason is that altcurrencies are offering something of value. Something man has sought ever since the standardized currencies were developed in ancient Lydia and that is anonymous transactions. Peer-to-peer currency transfer and decentralization and public ledger are also equally important parts of the cryptocurrencies and they also add value to the system.
How are these attributes not just as valuable and sought after as regular resources and anything of value? Nowadays we are besieged by a bankings system that doesn’t work and is often under attack through cyber attacks and other incursions.
If a new currency system promises and subsequently proves a new, secure, anonymous and uncontrolled way of money transfer, would an overwhelming majority of people would support it? Of course they would. That is what bitcoin was initially, a way to transfer money. Slowly it became a currency on its own and has since been valued higher each passing year. Cryptocurrencies can have something on the backend.
Now Ethereum and a few other coins are starting to offer something in altcurrencies that will definitely mean to have some backing in the physical world. For example, Golem is a cryptocurrency that envisages a super computer made from distributed computing around the world. This decentralized super computer is something tangible that can back the currency just like any physical super computer’s worth and power can back a real currency in a monetary system.
Same goes for a new project called Cloud Token which envisages decentralized cloud based storage. It will offer cloud storage at extremely cheap rates and will offer physical Grid nodes around the world for facilitating the new system. A cloud token based on this system will ensure that a robust cloud storage has its back.
There are countless other cryptocurrencies that are now basing their operations and coins on something tangible that might become profitable in the future.
So, it is now established that bitcoin and crypto world has something on its back and that is the promise of a novel way of sending money and an alternative currency system not based on debt and the limitations of such a system.
But, even monetary systems with backing can come crashing down. It happened almost twice, once in 1929 and once it almost happened in 2008. Now both of them were caused by the so called recklessness on wall street. While it is true, the problem goes much deeper in the heart of the corrupt interest-centric monetary system.
The problem is that the system is rigged for the taking. The governments are in charge and situation is that big fish can obtain loans and not worry about paying them off with interest. Small fishes on the other hand have a difficult time getting loans and have to pay exorbitant interest rates to keep the system going.
The central bank or in United States case, Federal Reserve Bank maintains the liquidity in the system and it controls the amount of printed notes that the other banks can hold. So, the bank can control the very price of the currency according to its will.
Since some powerful people are controlling the currency, they will certainly make the system rigged for maintaining their family’s, state’s, country’s, or in some cases fiat currency’s monopoly around the world. This bias prevents the free market from being totally free and tears it apart to rig it to a fewer number of people.
The cryptocurrency on the other hand has no central authority so people have hard time rigging it. The plan for the blockchain and its progress has been laid out to the coin holders and anyone can mine it to get more. Some people argue that the creators who hold coins in their name have the power to influence the money systems and that is true.
The creator of bitcoin named Satoshi Nakamoto has over billions of dollars worth of bitcoin in his purse. He can cash out and that can create a big price drop in the currency but still it won’t be like a bubble crash involving fiat currency. Also he has no authority over the running of bitcoin. He can influence the price for some time that’s for sure but infinitely? Like the governments are in control? No way!
So, back to the question; can cryptocurrency prices fail like a bubble burst, if ever? It might experience rapid price falls every now and then I think we have survived some. In July the bitcoin lost over $1000 in one week or so and the fears of a looming bubble burst were forever increasing.
But, soon it took off again and now it has increased value be over $1600 now to $4200. Once it hit the $4000 mark, renewed urges were made to avoid trading in them since they were following the graph of the 1929 stock exchange. To be fair, it did resemble it but do understand the fundamental difference that is in between the two scenarios.
The reason why the bitcoin value is increasing is because it is providing an alternative to the current monetary system based on fiat currencies. It will always have a potential for growth till the bitcoin overshadows the fiat currencies completely and becomes the standard currency or among group of currencies that takes over the world.
The current market cap of crypto is like $100 billion while the total currency around the world must be in hundreds of trillions of dollars. So, until the crypto world reaches that figure, there is genuine opportunity for growth.
So, in my opinion the only crash cryptocurrencies is face is that it will experience a sharp fall to a lower price range from which it will bounce back even if it takes a lot of time. Remember that nobody controls the movement of bitcoin. So, you don’t have to worry about the altcoin not being available because the banks failed and they can’t open anymore!
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