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  • Henry Brinberg

Cryptocurrency: Is it a Bubble?

The digital and decentralized currency called cryptocurrency is all the rage. The market reached $1.6 billion in 2021, and a whopping 16% of Americans have invested so far. The prices of the two cryptocurrencies with the largest market caps, Bitcoin and Ethereum, rose 17% and 191% in the past year, respectively. From mid-July to early November, the price of Bitcoin climbed over 100%, which shows the incredible amount of volatility that exists with even the most established cryptocurrency. That raises some questions; is the growth justified and sustainable?

Yahoo writes that Ryan Payne, president of Payne Capital Management, thinks that cryptocurrency is one of the biggest bubbles ever. A bubble is a situation where an asset is priced far higher than what can be reasonably justified, or higher than its intrinsic rational value. Cryptocurrency has no intrinsic value, which is why Payne thinks that there is too much money being poured into the cryptocurrency market. He even thinks that the price of Bitcoin can continue to rise because so much excess liquidity exists. He continues that people are not using cryptocurrency very much for commercial purposes. Economist Nouriel Roubini, who predicted the financial crisis of 2008, supports Payne’s ideas by pointing out that items are not actually priced in Bitcoin, and no one really buys anything using Bitcoin. Therefore, the term “currency” is sort of inaccurate when referring to crypto.

Expert investor Rich Bernstein also sees cryptocurrency as a huge problem.

Expert investor Rich Bernstein also sees cryptocurrency as a huge problem. He warns that the herd of investors who want to get involved in Bitcoin and other cryptocurrencies is becoming precarious due to the parabolic nature of crypto. An asset is parabolic when the value rises so quickly and exponentially that the chart of growth starts to look like a parabola. Parabolic growth is often driven by a frenzy of buying because everyone wants in on something that is going vertical. However, that causes unsustainable growth, and often leads to an eventual collapse where prices quickly fall. The fact that cryptocurrency has no true value is a part of what leads Bernstein to say that bitcoin could fall 90%, similar to what occurred during the dot com bubble in 2000.

According to the New York Magazine, John Paulson — who made $4 billion on account of his anticipation of the 2007 housing crisis — thinks cryptocurrencies are a bubble that will prove to be “worthless.” Michael Burry, who also made a lot of money from the financial crisis, has been suggesting for a while that bitcoin is on the brink of collapse. However, Zhu Su, the founder of Three Arrows Capital, thinks that these men who profited so much off of their ‘Big Short’ are only dooming bitcoin because they want to be consistent. His reasoning is that if these investors really felt so sure about the downfall of cryptocurrency, then they would have used their own money to bet against it in the market.

Just like crypto billionaire Zhu Su, many people love cryptocurrency and think that it is here to stay. Regardless of the volatility that comes with cryptocurrency, enthusiasts and investors are still incredibly optimistic about its future. Cryptocurrency has a lot of upsides, including its growing value. CNBC describes that crypto can make payments more efficient, can help people to avoid finance charades, and can allow for quick and transparent financial transactions across borders. Another upside of crypto is that the underlying technology, blockchain, has been predicted to become extremely important and helpful in a variety of industries.

NASDAQ writes about some of the other benefits of cryptocurrency. An important one is that it provides a secure place to hold your money. That can be especially essential in some foreign countries where standard currencies are extremely unstable. Additionally, even in the US, crypto provides an alternative to banks, and gives people more control over their finances and savings. Cryptocurrency also offers an alternative form of money transfer that reduces credit card fraud for both vendors and consumers, because it is not associated with a bank and all crypto transactions are permanent. Lastly, small businesses and innovation are positively impacted by crypto, because initial coin offerings (ICOs) allow for crowdfunding, which can be used as capital for a startup.

Cryptocurrency has a lot of supporters, but likely just as many opponents.

Cryptocurrency has a lot of supporters, but likely just as many opponents. Some of its benefits cannot be denied, but people have been investing in a pattern that looks troublingly like the period preceding past economic bubble bursts and crises. Nonetheless, cryptocurrency continues to grow, and hopefully the bubble does not get so enormous that it creates a disastrous pop.

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