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Is bitcoin a bubble? Three graphics to understand
The digital motto flies from records to records. Many observers warn of the risk of a bubble.
A bubble can be recognized only when it breaks out, they say. With bitcoin, however, observers are convinced that cryptocurrency is a purely speculative asset. Its rise does not correspond to any fundamental data of market, and the courses go straight towards a massive correction. Some do not hesitate to see the largest bubble in history. Here are three graphs to put into perspective the madness that has seized bitcoin and other cryptocurrencies.
-1- The classic model of a bubble
Robert Shiller, Nobel prize winner in 2013, is a specialist in bubble phenomena. In particular, he has written a book on "Irrational Exuberance" of the markets, referring to the comments of Fed boss Alan Greenspan in 1997. In his book, published a few months before the dot-com bubble, the economist estimated that equity markets were overvalued.
In 2005, Robert Shiller publishes a new edition to include the real estate market that he also considers at too high levels. From 2007, the first signs of cracking appear before the big financial crisis in 2008. Today, Shiller is very interested in cryptocurrencies.
In an interview at the Quartz site, the economist believes that the best example of the bubble moment is bitcoin. He insists on the "storytelling" of the motto. A creation by a mysterious Satoshi Nakamoto, an operation out of any central bank, the impossibility of governments to regulate ... in short, a motto that fits perfectly with the air of the post-financial crisis time.
The classic phases of a bubble. - Wikimedia
It is precisely in the wake of the financial crisis that the economist Jean-Paul Rodrigue developed the graph above detailing the phases of a bubble, from its formation to its burst. Comparing it with bitcoin, the motto appears as a cartoon example of a bubble in formation. After taking off in 2013, he experienced a first correction in 2014. It is with increasing media attention and personal attention that bitcoin has begun to skyrocket since 2017.
The price of Bitcoin in dollars. - Coindesk
-2- The fastest bubble in history
Another graph has circulated a lot in the cryptocurrency community. He compares the evolution of the price of bitcoin with that of other indices that have formed a bubble. This has raised many debates - as here - about the number of years to remember for bitcoin, or the scale to use - logarithmic or not.
Beyond these debates, by observing the previous bubbles, that of real estate or the Internet bubble, we note that they have grown for 10 years before bursting. On these 10 years, they inflated 1.000%. What about bitcoin? Since a low in mid-January 2015 160 dollars, there is barely two years, he took 1.360% to almost 17.000 dollars. From this point of view, bitcoin would be one of the fastest bubbles in history.
-3- If it's a bubble, is it dangerous for the global economy?
The first thing to keep in mind is that even if the bubble were to burst, the digital currency would not disappear. Amazon or Apple have both gone through the dotcom bubble. The second thing is to measure the weight of bitcoin to better grasp the potential shock of a currency crash. In this case, according to the MarketCoinCap site, the total capitalization of cryptographic currencies is more than 400 billion. Bitcoin alone is close to 260 billion.
These numbers may seem huge, but in the financial world this is not impressive. On the foreign exchange markets, the equivalent of 5.100 billions of dollars are exchanged every day. Global market capitalization is 78.000 billion. At the time of the subprime crisis, US household debt was approaching 13.000 billion.
The capitalization of cryptocurrencies borders 420 billions of dollars. - CoinMarketCap.com
In reality, more than the size, the danger comes mainly from the links between actors via derivatives. Thus the small hedge fund Long Term Capital Management (LTCM) has shook the global markets in 1998 in its near-bankruptcy. LTCM, which had a strong leverage effect, was very connected to the banks which are themselves interconnected and finance the entire economy.
Same thing for the subprime crisis: the amount of subprime debt in the United States was relatively small, but it contaminated the entire US credit market and the entire planet by being mixed with other assets in the United States. complex derivatives through securitization.
At the moment, few companies are funding bitcoins, and in the absence of official listings on recognized stock exchanges, it is still difficult to develop bitcoin derivatives. But that should change in the coming times. Indeed, the CME Group is preparing to launch a futures contract on the digital currency.
Edit add, a video of 30 minutes to see to understand the interest of crypto currencies:
Use the subtitle function and automatic translation into French ...