Understanding The Bitcoin Bubble

In economics, a bubble means trading of a specific asset at a price that deviates strongly form its intrinsic value. The cryptocurrency Bitcoin is currently in a bubble. So, what is Bitcoin bubble?

About the Bitcoin Bubble

As of June, 2017, one Bitcoin (BTC) was worth $3,018.54. This is a far cry from the average price of a BTC in 2010, which was $0.08. You don’t have to be an economic genius to say that it is quite a huge jump in asset value.

From May to June of 2017, the price almost doubled. So, how did the Bitcoin price increase by so much in one month? People living in the US or Canada may find the reason baffling. However, the real culprit is quite simple, and that is mainstream acceptance – not in North America, but in Asia.

The huge demand for Bitcoin in the Asian market caused the price of the cryptocurrency to skyrocket. A lot of Asian investors are interested in buying Bitcoin because of speculation. They want to make money fast by buying the cryptocurrency, allow it to increase in value, then quickly selling it off for profit.

While the price of Bitcoin has begun to drop since July, and is now at $2,436, it can still be said that the cryptocurrency is doing well. That may not be true if the price downtrend happened to another underlying asset.

If you consider Bitcoin’s history, however, you should be on your toes. Something similar happened in the past, specifically in the years 2011 and 2013 when the price of the virtual currency soared way up, only to crash later in dramatic fashion.

The Asian Bitcoin Boom

The 2011 and 2013 Bitcoin booms was limited to North America, specifically the US. During those days, Bitcoin was not yet as internationally accepted as it is today. Thus, the recent boom that happened earlier this year can be attributed to the cryptocurrency’s recent global popularity.

Looking at BTC prices in various foreign markets would reveal that there is huge demand in May in South Korea. Back then, a BTC was worth around 5 million won or roughly US $4500. The price is much higher than the BTC price in the US, which was pegged at $2700. This contributed to the most recent Bitcoin bubble.

Now, you may ask how the huge spread can happen in the Bitcoin market but not in the case of more mature currencies. How is this possible? This is because trading with mature currencies involve simple and quick currency exchanges. Since BTC is not part of forex, buying Bitcoin with USD then selling the Bitcoin for SK won, then converting the won in USD is affected heavily by regulations and logistical impediments. Simply put, it will take time to complete such a trade to satisfy the South Korean demand.

In addition, Japan’s recent acceptance of Bitcoin played a big role in the price boom in June. Historically, Bitcoin benefits each time a national government recognizes the cryptocurrency. This means, another location where the virtual currency can be freely used or used with some limitations.

In the case of Japan, the country passed a number of laws and regulations that will apply to Bitcoin, as well as other cryptocurrencies. This development led to the heightened interest in Bitcoin by a lot of world famous Japanese businesses.

Money Transfer Using Bitcoin

If you often send money to a foreign country, you would know that the process can be nightmarish. Aside from being notoriously slow, sending money via MoneyGram or Western Union is very expensive. Thus, it is quite easy to understand why Bitcoin is the ideal currency to use for transferring money anywhere in the world.

This scenario has already happened, and a lot of companies are now offering money transfer services using Bitcoin at much friendlier rates coupled with superior service. Asia dominates the money market transfer, while North America contributes only a small portion of the market.

One reason for this is the fact that the US dollar is the dominant currency worldwide, and transferring dollars and other currencies might cost less than transfers between non-US dollar currencies. This results to the inability of Bitcoin-based services to undercut with the US dollar, unlike other currencies.

Final Word on the Bitcoin Bubble

There are lots of Bitcoin applications around the world. At present, it appears to be a bit limited in the global market. Most likely, this is because the virtual currency is still in its early stages. One thing is sure, however. More and more people are getting interested in the cryptocurrency for a number of different reasons. This triggers the steady climb of the Bitcoin price on the market.

Similar to many other currencies and assets like stocks, Bitcoin has started to experience crashes, booms, and bubbles. The ultimate and most important question that comes to mind is: can Bitcoin survive all these? By all indications, the answer is in the affirmative. Bitcoin is here to stay. In fact, it is one of the best cryptocurrencies to put your investment money in this year.

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