My friend asked my opinion on Bitcoin and we had some discussion. My thoughts are clear from beginning about cryptocurrencies.
Bitcoin reached new heights in trading and surpassing first time 17000$ on Thursday 07/12/17. This price increase from under 1000$ to over 17000$ in a year is pure speculation and is a perfect bubble which makes lot of people excited as its prices are increasing.

Source: GDAX

For any currency to have real value, it should be controlled by economic systems like Federal Reserve or governments. Since cryptocurrencies are decentralized, banks or governments cannot produce new units and therefore they have not provided any backing for such cryptocurrencies.
World needs financial regulations to control crimes but since such cryptocurrencies have no regulated authorities, it does not need to get compliant with any law in world. On contrary, banks need to get compliant with certain laws like money laundering. For any currency, it needs to have two criteria. It should be medium of exchange and it should be store-hold of wealth. You can not spend Bitcoin easily and due to very volatile nature of Bitcoin, it is not an effective store-hold of wealth. If governments allow after examining, it could be a private currency.
Bitcoins were created in 2009. Since its creation, it has not been tested in business cycles like in a depression. True value will be revealed when it hits a financial crisis like we had in 2008.
According to Wikipedia, number of cryptocurrencies are over 1324 and it is still growing. Creating a new cryptocurrency is easy and any one with simple coding skills like C++ can create their own cryptocurrency in a day. What if Bitcoin might loose competition to another currency?
Although, I am skeptical of cryptocurrencies but I am very favor of moving from paper currency to digital economy. Sweden central bank is considering the introduction of “e-krone” and it will make a decision within two years. Other countries like Norway, Canada & UK are also investigating into this area.
Blockchain – technology that enables bitcoins is revolutionary. It is decentralized and eliminates the need of any intermediaries or middle man needed to do the transactions. This technology is empowering businesses across globe to do transactions mutually without costly intermediaries. Transactions are authentic, immediate and transparent. Blockchain technology has potential to design new business models which are low cost and can disrupt many industries while eliminating middleman.
Here is a short video explaining how Bitcoin works:

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6 thoughts on “Is Bitcoin a Bubble Waiting To Burst?

  1. Hi Khalid,
    Although I agree that Bitcoin most probably is a bubble, and that you bring up several important questions, I would really appreciate a more thorough reasoning for the argument below.

    “For any currency to have real value, it should be controlled by economic systems like Federal Reserve or governments. Since cryptocurrencies are decentralized, banks or governments cannot produce new units and therefore they have not provided any backing for such cryptocurrencies.”

    I don’t know if this is regurgitation of a mantra or maybe referring to a some definition of currencies since the 1970’s, but I would urge you to explain your reasoning behind this statement as I fear you have missed the point of currencies entirely. Are you suggesting that there cannot be a medium of exchange which is not controlled by a national government? Are you suggesting that the value of a currency is the ability of a government to impose inflation?

    Secondly, I implore you to think about the following: If you have bought a bitcoin (regardless of driver) and sent it to a wallet you have now (with overwhelming probability) become part of a worldwide network which will accept bitcoin in return for goods or services. How does this relate to past bubbles? How does this relate to social media or other network effects?

  2. The heart of your writing whilst appearing agreeable in the beginning, did not really work very well with me personally after some time. Somewhere within the paragraphs you actually were able to make me a believer but just for a while. I still have a problem with your leaps in assumptions and one might do nicely to help fill in all those breaks. In the event that you actually can accomplish that, I will undoubtedly be impressed.

  3. Hello! Do you use Twitter? I’d like to follow you if that would be okay. I’m undoubtedly enjoying your blog and look forward to new posts.

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