Nearly all financial analysts believe bitcoin is a bubble, and if you compare it with past bubbles such as the tulip bubble of 16th century or the housing market bubble of 2007, bitcoin has striking similarities with all those. Lets take a look at stages bitcoin has gone through since its inception.
Stage 1 (2009-2011): Introduction and adoption by black markets.
In 2009, Satoshi Nakamoto published the bitcoin white paper outlining all the technical workings of bitcoin. Shortly afterwards bitcoin was formally launched and was quickly adopted by the black market as medium of trade, which increased its demand to the point where it surpassed the value of US Dollar.
Stage 2 (2011-2012): Early stage investors.
As people saw the rise of bitcoin from $0.003 to $1 many early stage investors saw it as a great investment opportunity if bitcoin continued to rise in same way. Ironically this expectation of increase in value actually led to the rise in value because more and more people started to buy it only to sell it for a profit later.
Stage 3 (2012-2014): Mature investors and introduction to general public.
As the demand for bitcoin continued to increase (owing largely to influx of early stage investors), prices started increasing to greater heights. Investors started making bigger and bigger trades with it. This was also the stage where bitcoin started getting some degree of public adoption outside of the black market as many restaurants and shops started accepting payments in it.
Stage 4 (2014-2016): Early stage hype and rise of inexperienced investors.
By this time, bitcoin’s worth had crossed hundreds of dollars so naturally mainstream media and financial analysts started to give it serious attention which gave birth to the hype surrounding bitcoin investment. Many people with little knowledge of bitcoin and almost no knowledge of investment started to pour their money into it.
Stage 5 (2016-present): Late stage hype.
The craze of investing in bitcoin has continued to rise and has spread to people from all walks of life ranging from professionals to students to barbers and uber drivers.
In finance industry there is a running joke: “when your taxi driver suggests you to invest in a stock, you know it is actually time to sell it.” Meaning when people who don’t usually invest are taking interest in a market, it means price is up due to massive hype and not genuine demand. This seems to be true in case of bitcoin because almost no one is buying bitcoin to actually use it. People only want to buy it because the hype around bitcoin leads them to believe that value will rise further.
Stage 6 (time frame unknown ) : Peak, Panic and crash.
All items touch a peak value at one point or other after which any further rise is impossible. This can happen due to natural decrease in demand, or due to government regulations and crackdowns or maybe because investors lose confidence in the market. In either case, once bitcoin touches a peak value and there is no further chance of profit, investors will start to sell it so they can move to another market. In many other markets the impact is small because people who need that item continue to buy it, but in case of bitcoin where more than 90% of bitcoin owners are investors and not users, it means after the peak, 90% of bitcoin users will go out to sell their bitcoins and almost no one willing to buy it. When that happens, the market will go into panic mode and prices will plunge down into the ground.
This will mark the end of bitcoin bubble, after which it will take several months and maybe even years for bitcoin to rise back up to $10 or $20.