Why Bitcoin is Not a Bubble?

The internet is replete with people referring to bitcoin as a “bubble.” They are spreading fear, uncertainty, and doubt galore. They believe bitcoin’s high price spells impending doom, but their criticisms move beyond mere skepticism. It seems like they just hate cryptocurrency. Yet many of these pundits do not fully grasp bitcoin…or even economics.

Bitcoin is special. It is not a company that could lose profitability and fail. It is certainly not a speculative real estate scam that could crumble as a result of government and bank-induced chicanery. Bitcoin is another animal.

Its value is not increasing because of marketplace lies. It is increasing because it is a life-changing financial invention. It is increasing because more people are adopting it. The “network effect” is in full swing.

It is true investors are rabid to get on board and this excitement is causing bitcoin’s price to explode, but do not confuse this with an artificially inflated bubble based on a “false truth.” In accordance with the network effect, the more people that continue to get involved with bitcoin, the higher the price will climb.

Bitcoin is also growing as a result of basic economics. The supply is limited to 21 million units and this necessarily makes bitcoin a scarce asset. When things are scarce and people want those things, their value will ultimately rise. Supply and demand at work.

Thus, when economics and the network effect intermingle, you have a recipe for explosive growth within an asset. Bitcoin is not some new version of the 17th century tulip bulb. It is a groundbreaking advancement in accounting and money.

Bubbles versus Technological Failures

With that said, this does not mean Bitcoin is guaranteed to succeed. The price could be affected if something bad were to happen to the protocol that underlies it. If this kind of event ever occurred, people would certainly lose faith in bitcoin and its price would collapse.

However, this is not the same thing as an artificially hiked price or “bubble.” It is the result of a technological or community failure, but not a market failure. For instance, Bitcoin just upgraded to Segwit. However, Segwit does not necessarily align with Satoshi Nakamoto’s vision that Bitcoin should be a scalable, peer-2-peer cash system. Instead, it turns bitcoin into a settlement layer, which could do harm to the currency.

This illustration is not intended to spread panic. I am just saying bitcoin is susceptible to failures and crashes. It is just that these potential crashes are not the result of a “bubble.” They would occur because the community failed to make bitcoin economically viable. In either case, many people hope Segwit will work over the long run and that there will not be a technological failure.

Why do people believe bitcoin is a bubble? How big will bitcoin actually grow?