Last updated:

May 28, 2024 11:49 EDT
| 9 min read

Critics, both inside and outside the crypto community, contend that the Bitcoin bubble could burst at any time. But is there a bubble at all, or is Bitcoin a store of value against inflationary fiat currencies? Perhaps both could be true, with Bitcoin’s value running ahead of inflation but ultimately being safer than holding cash.

In this guide, we’ll investigate the alleged cryptocurrency bubble, poking at the arguments to see if or when the Bitcoin bubble burst might occur. Let’s talk crypto bubbles.

What is a Bubble?

In financial markets, a bubble refers to an overinflated market that could create massive losses for investors if the bubble pops. The term implies that the price is higher than the underlying value and that when the asset’s price returns to its intrinsic value, many investors — specifically those who invested late — will lose money.

Cryptocurrencies like Bitcoin are seen by many as a speculative bubble because the intrinsic value isn’t always obvious. They’re also intangible. Michael Saylor, a well-known Bitcoin investor, can’t roll around in his bitcoins. It’s all numbers on a screen.

Reasons Why Bitcoin Could Be a Bubble

Those who think BTC +0.77%is overpriced often point to the speculative nature of cryptocurrencies and of Bitcoin in particular. Bitcoin’s spectacular crashes lend some credence to the notion that there are Bitcoin bubble cycles. In an extended fall from grace, BTC dropped from its previous $69,000 all-time high in November 2021 to a dustlike $15,500 a year later. Skeptics point to the lack of fundamental value. Let’s discuss all of these elements.

Lack of Intrinsic Value

Intrinsic value refers to the natural or real value of an asset. For example, when discussing stocks, you can consider cash flow and assets to determine the intrinsic value. For real estate, you could again measure cash flow or resale value. If a property is priced above its cash flow or retail potential, it’s priced above its intrinsic value; you’ll likely have to wait longer for the investment to pay off.

In itself, Bitcoin doesn’t have yields or cash flow. It just sits there being numbers on a screen. The whole thing is code, open-source code, in fact. Anyone can copy Bitcoin’s code and make another cryptocurrency that works in the same way. Thus far, over 35,000 people have forked the project, meaning they made a copy that can be studied, tweaked, or rebranded. Given the ease of making a carbon copy, why does Bitcoin have value at all?

Price Driven by Speculation

Free markets excel at price discovery, but not without overshooting or undershooting first in most cases. At first, trading markets are guesses at value or, at best, speculation.

The perils of wild speculation aren’t unique to cryptocurrency bubbles. The dot-com bubble of the late 1990s sent any stock with a dot-com in its name to stratospheric heights. Similarly, the real estate market in the US exploded in the early 2000s. By the late 2000s, housing exploded in a different way, leading to the Great Financial Crisis (GFC).

Many wonder how the price of Bitcoin is determined and what logic lies behind bidding up the price of numbers on a screen and “coins” you can’t hold. To the average person living outside the crypto bubble, it might even seem a bit absurd. Fair point. After all, these are the same traders who speculate on the price of tokens featuring a frog or a dog, none of which are real. Before meme coins, we had Bitcoin, one of the earliest speculative digital assets, and some might say it was the biggest meme coin of all.

Prone to Huge Price Crashes

During the beginning of the stock market crash in 1929, the DOW fell by 12% in a single day. The world was horrified, and as the dominoes of an interconnected and overleveraged financial system fell, the Great Depression began.

In a crypto context, a sizable pullback isn’t unusual. In a few hours, the entire crypto market might be raging again to erase losses.

But that volatility can and does lead to much larger crashes. When a 12% loss becomes a 20% loss, followed by another down day, everyone starts selling. Leverage trades keep the crash moving downward as long positions get liquidated, forcing even more sales.

Bitcoin is a digital asset — just numbers on a screen. But when the crypto market crashes, its lower value in USD is real.

Arguments Against Bitcoin Being a Bubble

Okay, so Bitcoin is an intangible digital asset with no intrinsic value that’s crash-prone due to rampant speculation and leveraged positions. Or is it? The arguments against a Bitcoin bubble aren’t so outlandish once you consider the data points. While it’s easy to find crashes on a chart, Bitcoin has been an outstanding hedge against inflation — on a long enough time horizon.

Buyers in 2013 watched Bitcoin rise from under $10 to nearly $14,000 by year-end 2017. While Bitcoin’s price later rose to $69,000 in 2021 and fell thereafter during the bear market, there’s an underlying trend. Ignoring the larger peaks on the chart, bubbles perhaps, the chart slopes upward in a gentle curve. Over time, Bitcoin provided a safe haven against fiat currencies.

Some countries have even adopted Bitcoin as an alternative currency.

Increasing Adoption and Utility

El Salvador led the way in adopting Bitcoin as a legal tender and now even mines Bitcoin to add to the state coffers. The Central African Republic (CAR) also experimented with Bitcoin as a legal tender as well as a Bitcoin-backed currency. Ultimately, the effort failed, largely due to limited internet access. Only about 10% of the country’s population has online access.

El Salvador remains the largest state-sponsored Bitcoin nation, but others are moving in a similar direction as the population itself adopts Bitcoin. Turkey is ranked 4th worldwide in cryptocurrency transactions. Part of this interest in Bitcoin and cryptocurrencies stems from the steep slide in the value of the Turkish Lira versus other currencies. The resulting price inflation makes cryptocurrencies like Bitcoin an attractive alternative despite the volatility.

Protocols like the Lightning Network make Bitcoin a usable currency for everyday transactions. A standard Bitcoin transaction can be costly, whereas the Lightning Network allows fast transactions that cost just a fraction of a penny. Newer protocols like Stacks promise to bring smart contract functionality to Bitcoin by adding an additional layer that uses the Bitcoin base layer to secure transactions.

Hedge Against Inflation

Turkey’s inflation rate rose to 67% in 2024, encouraging citizens to consider alternative stores of value. Some are trading their Liras for US dollars.

Bitcoin and other digital assets provide sanctuary for others as the US dollar itself is also inflationary. The M2 money supply steadily increased since the US cut its last ties to the gold standard in 1971.

Another chart from the Federal Reserve shows Bitcoin’s price relative to the M2 money supply, with Bitcoin’s price far outpacing the money supply. However, we also have to account for all the other currencies in the world, many of which have seen much higher inflation compared to the US. Interestingly, when viewed against M2, Bitcoin’s peaks are lower relative to Bitcoin’s USD chart shown earlier.

The value of Bitcoin might be better measured by its relationship to world currency supplies rather than its value in units of a specific currency.

Limited Supply and Decentralization

The attraction to Bitcoin, in particular, centers on its limited supply and worldwide network. Bitcoins are still being mined, but the rate of new bitcoins produced by miners has recently halved, with these Bitcoin halvings occurring every four years.

By 2140, we’ll have about 21 million bitcoins, which is all that will ever exist. This hard cap is set in Bitcoin’s code, and while the code can change, a worldwide Bitcoin network of node operators enforces this limit by choosing which version of the code to run. An increase in supply would be against the economic interests of the Bitcoin community, so expect the limit to remain fixed.

By contrast, leading world currencies like the US dollar have no maximum limit. Traditional fiat currencies use debt issuance to create more currency, a process to which many attribute boom and bust cycles, including the Great Financial Crisis (GFC). Bitcoin was released in the aftermath of the GFC.

Will The Bitcoin Bubble Burst in 2024?

Our own Bitcoin price prediction doesn’t see a bubble burst in the near future. Instead, we expect steady growth, with the chart showing fewer parabolic peaks as the market grows and Bitcoin usage worldwide continues to see adoption.

• In 2024, we see Bitcoin’s price reaching as high as $90,000 with a low-end price of $42,000.
• By 2025, our analysis shows that Bitcoin trading will be between $55,000 and $101,000.
• Longer term, we see Bitcoin trading as high as $160,000 by 2030.

Of note, our long-term Bitcoin price predictions favor more conservative projections. Cathie Wood, CEO for ARK Invest, sees Bitcoin reaching as high as $3.8 million by 2030.

Even Bitcoin’s rise in 2024 showed a more cautious approach from investors. Current Bitcoin prices have the token at a level close to the previous high set in 2021. However, the Bitcoin market now benefits from wider use and additional ways to invest through Bitcoin spot ETFs (exchange-traded funds). The role of ETFs could be key in keeping Bitcoin’s price less volatile as the asset reaches a broader audience of investors.

Conclusion

The Bitcoin market can become overbought like other assets, including stocks and real estate. However, this doesn’t always indicate a Bitcoin bubble. Instead, the market got ahead of itself in regard to real-world usage. Speculation and fear of missing out drive the peaks in the Bitcoin market. If the market gets ahead of demand, the price suffers when the market regains its sanity. This often results in oversold conditions and much lower prices as the market cycle runs its course.

Beneath the peaks and valleys of the Bitcoin chart, an underlying pattern tracks just north of the growth in the supply of fiat currencies. The speculation-driven peaks in the chart were bubbles by any definition, but the demand for a sound alternative to fiat currencies remains. For many, Bitcoin is that alternative.

FAQs

What is a crypto bubble?

A crypto bubble refers to periods during which speculation and euphoria combine to create parabolic price movements. Arguably, 2021’s peak represented a speculative bubble that ultimately popped. However, today’s market shows a more measured approach, particularly since the introduction of Bitcoin ETFs that allow a wider market to have a voice in the price of Bitcoin.

Is Bitcoin a bubble?

Bitcoin’s current market doesn’t show the same signs of a bubble as those seen in 2021’s bull market. Leverage plays a role in bubbles, but the introduction of Bitcoin spot ETFs helps reduce the role of leverage in the Bitcoin market while also making crypto trading available to a wider audience of investors.

Does Bitcoin have intrinsic value?

Bitcoin’s value is in its limited supply and worldwide network. While Bitcoin doesn’t have a yield or provide cash flow, traditional ways to measure intrinsic value, it serves as a sound alternative to traditional inflationary fiat currencies. Bitcoin’s supply is fixed at a maximum of 21 million bitcoins.

References

About the Author

Eric Huffman’s background includes a decade plus in business management as well as personal finance industry experience in insurance and lending. A strong understanding of consumer finance combined with a consumer advocate stance brought Eric to the crypto industry, where he writes articles and guides aimed at making crypto easier to understand.

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