Posted by Xoken.org – Once a major investment and trend during the pandemic, the debate regarding Bitcoin is very intense. Some see it as a revolutionary asset that gives users control over their finances and increases the transparency of operations.
While a somewhat skeptical opinion, they emphasize the price volatility and accusations of illegal use, which ultimately makes them question the true value of Bitcoin.
Moreover, currently there is a financial bubble, which is also called a market bubble or economic bubble. An economic bubble occurs when asset prices rise quickly, but then fall just as quickly. Experts and even the general public already know what financial bubbles are, but these bubbles often only become known about their existence after they pop.
The strong characteristics of a financial bubble are, lack of fundamentals, instability, excessive risk taking, media excitement, and collapse. But for simplicity, buyers push the price up beyond the actual value of the asset. However, the bubbles that have formed are very complicated and difficult to untangle.
Bubble development consists of five stages:
1. Shift
This stage begins with major changes, such as the emergence of new technology or very low interest rates. For example, the decrease in the federal funds rate from 6.5% to 1% (May 2000-June 2003) paved the way for the formation of a housing bubble.
2. Boom
Prices begin to rise, attracting more participants to the market and gaining widespread media attention.
3. Euphoria
During this phase, people are very excited and asset prices soar. For example, during the Japanese real estate bubble, land prices in Tokyo reached $139,000 per square foot (for comparison, they are now around $25,000).
4. Profit taking
Smart investors recognize the signs of a bubble about to burst and start selling their positions.
5. Panic
When a bubble pops, prices fall as everyone rushes to sell assets. This happened in October 2008 when major financial institutions collapsed and triggered a global market crash.
Does this apply to Bitcoin?
Bitcoin has had a complex journey. Bitcoin’s journey is quite complicated. Its emergence began more than 15 years ago with a mysterious creator named Satoshi Nakamoto, who introduced the concept in a nine-page white paper in October 2008.
Since then, cryptocurrencies have experienced ups and downs. Bitcoin is gaining recognition for its potential as an investment, hedge against inflation, and store of value. However, Bitcoin has also faced criticism for its use in illegal activities on the dark web.
Regulation is also a major obstacle for Bitcoin. Policymakers seek to prevent fraud and money laundering while supporting the growth of the industry, so they are trying to strike a balance between encouraging innovation and protecting consumers. And the regulations are getting clearer every year.
Bitcoin is a combination of two opposites: a still small, but quite popular, niche market; and polarizing, but compelling. Its development is also significant day by day because more and more people, businesses and governments are using it.
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Does Bitcoin have bubble characteristics?
There are several similarities, namely Bitcoin experienced a rapid and massive price increase in a short time. The cryptocurrency market, including BTC, is known for its high volatility, attracting the attention of speculative traders looking for short-term profits. Additionally, Bitcoin gets media attention during periods of price spikes, and there are some group behaviors that motivate people to buy Bitcoin because other people are doing it.
It cannot be denied that these characteristics can cause concern and anxiety among investors and market participants. However, Bitcoin has unique properties that are different from typical bubbles.
● Its adoption is becoming wider by various institutions, its use is increasing as a financial asset, and it is recognized globally as a digital store of value.
● Bitcoin cannot be valued using conventional valuation methods because it does not generate income like companies and commodities do. Bitcoin is in a category of its own.
So, this crypto asset does not meet all the criteria to be called a bubble.
Bitcoin’s role in the financial revolution
Bitcoin introduced big ideas that had never previously been thoroughly explored. However, doubts remain about whether the complete change its creators envision in the financial structure will come to pass.
Bitcoin was always intended to provide an alternative to existing systems without replacing them completely. Many projects show potential for independent monetary policy, but an appropriate regulatory framework is still needed to support their adoption. By 2024, many of these measures have already been implemented or will be implemented.
The recent welcoming of Bitcoin by major institutions marks an important shift in public acceptance. Morgan Stanley and JPMorgan are launching Bitcoin funds, and Goldman Sachs will do the same globally, while Citi Private Bank is considering options for client inquiries regarding cryptocurrencies. Even the Japanese Government Pension Investment Fund is considering adding assets like Bitcoin to its pension fund portfolio.
Bitcoin has become a major player in the financial world and still shows superiority today.
Find and avoid bubbles
You can never be completely sure that something is legitimate. Let’s discuss the various tools available to verify whether a phenomenon is a bubble or not.
To avoid getting caught in an asset crash, the key is to keep up with developments. For example, consider the practical use cases that drive actual demand for Bitcoin, such as increased adoption for online payments or as a store of value.
Next, apply good risk management: diversify, use stop-loss and take-profit orders, and maintain a balanced portfolio. Avoid excessive leverage and only invest funds you are comfortable taking risks with. Thorough analysis is also very important. If you are considering Bitcoin as an investment vehicle, look at the underlying technology and evaluate market sentiment.
Lastly, pay attention to the applicable regulations because these regulations indicate the legitimacy of the asset. In the US, the SEC ensures investor protection in the crypto sector. In the UK, crypto assets are regulated under the Financial Services and Markets Act 2000 by the FCA. The Indian Finance Act 2022 defines virtual assets as property and outlines the tax requirements for income from such assets.
Are you ready? This strategy will ensure you stay abreast of information and developments, ready to face changes in the crypto world.