Is the Bitcoin bubble finally over?

Somebody asked me if the bitcoin bubble's over yet. I guess this recent drop in prices has everybody wondering.

(BTW bitcoin is still 2x higher than it started this year, go figure.)

The answer is no. Definitely not over as of December 2019.

Bitcoin is a $150 billion commodity hardly anybody uses. Developers and businesses are spending millions of dollars on technology and services nobody’s asking for, all in an attempt to force bitcoin into the mainstream.

As long as that trend continues, you can’t say the bubble’s over. In fact, bitcoin’s momentum keeps getting stronger.

On-chain activity has risen to near all-time highs and the number of active wallets continues to grow. A second-layer payment relay system, Lightning Network, continues to add nodes. Hashrate, a measure of network security, recently hit all-time highs.

Check out some other metrics from CoinMetrics, BitInfoCharts, and BitVisuals:

• Coinmetrics
• BitInfoCharts
• Lightning Network Statistics

Bitcoin’s price is still 17x from where the bubble began in 2016. In fact, it’s up almost 100% this year (despite the recent pull-back).

What about 2018?

Oh, you mean when prices fell 85 percent over the course of a year?

Don’t sweat it. Huge drops are normal for bitcoin. It’s dropped 85% several times in its short history. See red arrows, below.

As far as that 2017 “boom” everybody remembers? It didn’t come from some massive infusion of global wealth. More like a sudden rush of modest amounts of money.

At the beginning of 2018—the crash—total bitcoin wallets numbered less than 30 million worldwide and the biggest exchange at the time (Coinbase) had only 12 million accounts worldwide. Most people had more than one bitcoin wallet, meaning the number of actual users was probably far lower.

Bitcoin was a nice story and a fun media event. A few people put a little money into bitcoin over a short period of time. It seemed real because of all the memes and media coverage and because everybody knew somebody who had some bitcoin.

But what about the hype? The ICOs? Lambos? Moon? The crash?

Hype does not make something a bubble.

Pro wrestling was HUGE when I was in high school (late 1990s). Super hyped. By the time I got to college, nobody cared about it anymore. Yet, WWE was worth a billion dollars at the time.

Now it’s worth even more and dozens of smaller promotions around the world are thriving. Wrestling is still a booming business, probably even bigger than it was back then. No bubble burst. People just stopped getting hyped about it.

Likewise, a sudden rising price doesn’t make something a bubble. Look at the price of cobalt since 2005:

Did we miss the cobalt bubbles of 2008 and 2017?

No. Cobalt’s prices spike now and then. Supply and demand gets out of sync sometimes.

Bitcoin’s price has gone 1,000x up and 85% down forever. In fact, most of us would worry if bitcoin’s price didn’t go up or down a lot. Like spikes in cobalt’s price, spikes in bitcoin’s price are normal.

In a true bubble, prices get detached from reality. You spend $25 on a fidget spinner that cost $2.99 a few months ago. Nothing changed. The technology, the cost of inputs, the cost of shipping, etc -- it all stayed the same. Yet prices boomed.

How will we know when the bubble bursts?

Asset bubbles can go on for a long, long time. Some say the bond market is a bubble. Have you seen prices lately?

It’s really hard to know when you’re in a bubble, but there’s only one way to know when it’s ended:

Prices go back to where they started (or lower).

Don’t take my word for it. This is based on research by Nobel Prize winners, most notably Robert Shiller. I suggest you read any of his works.

Fidget spinner prices went back to $2.99, where they've stayed ever since.

So, by that logic, until bitcoin goes back to $1,000, don’t fear the bubble bursting.

(Assuming there ever was a bubble in the first place.)

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