Towards the end of last year the upward movement of the price of bitcoin (BTC) seemed unstoppable and it would not have been crazy to assume that record highs would keep on being broken. Some investors who piled on were able to make a profit. The same was replicated with other digital currencies as investors tried to take advantage of arbitrage opportunities. There were also those investors who bought other digital coins with the aim of diversifying their virtual assets portfolio.
Due to the heavy demand experienced at the time some crypto exchanges ended up crashing. Those who had been holding virtual currencies for some time were rewarded with a record high just before Christmas. As a result of the excitement amateur traders and professional investors predicted that the price of bitcoin would see new record highs come the New Year. According to these traders this would be because investors would buy every dip just like is the case in every high-yield market that experiences a lot of volatility.
There were also those traders who expressed optimism that bitcoin would see universal adoption and this would only raise demand for the virtual currency thereby raising prices even higher. Even as the price of bitcoin crashed to below half its record high, which had been hit just a month prior, enthusiasts of cryptocurrencies were still optimistic about the prospects of the virtual currency in January this year. Some even said the price of the virtual currency would increase to a high of $100,000 per coin by the end of 2018.
However it is now May and the price of the largest digital currency by market capitalization is hovering around the $8,500 mark. According to bitcoin bears this is a classic case of a bubble that has burst.
This is reinforced by the fact that the price of the virtual currency is exhibiting similar behavior to that of the 1929 Wall Street crash. With regards to the 1929 crash a sizeable rally was experienced following the initial crash and then there were smaller ones that followed. Basically though the underlying trend was that the movement was downwards with stocks eventually losing all the gains that they had made the prior decade. In the event that Bitcoin follows a similar pattern then it is possible for the price to fall to zero.
Less than a month ago the Allianz Global Investors’ global economics and Strategy head, Stefan Hofrichter, said that the prices of bitcoin were in a bubble and in the near future it was likely to burst due to inherent flaws in its design. According to Hofrichter the digital currency ticked all the boxes that are essential criteria with regards to asset bubbles.
Some of the criteria includes a fivefold increase in trading volumes in the course of half a decade, the lack of any financial regulation as well as the unveiling of related financial instruments that include bitcoin futures. Additionally Hofrichter said other factors making bitcoin a likely bubble were the fact that it lacked intrinsic value as it possessed no assets nor generated income.
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