Is Bitcoin in a Bubble?

Bitcoin is smashing it’s head against the foundations of society. Looking back a decade we have seen it’s price rise to unsustainably large levels twice. Once in 2011 and once again at the end of 2013. Three and a half years later … is it time for history to repeat itself?

Or will Bitcoin finally smash the centralized banking system?

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My Opinion

Yes, it is in a bubble. It’s not ready to smash the banking system yet.

This recent interview with Vitalik Buterin (inventor of Ethereum) gives a great idea of the hype outside the space from his perspective on the inside. For Ethereum to deliver on it’s promise of a cryptographically secure decentralized super-computer, there are unsolved computer science problems that must be overcome.

He estimates it could take upwards of 10 years for Ethereum to mature enough to support large scale global usage. The current systems are unable to process enough events on the blockchain, and the same can be said for Bitcoin.

He also said something to the effect of

“when Vladimir Putin and Paris Hilton are talking about the blockchain, that’s peak hype”

This level of hype can not last for much longer, and the wild price action we’re seeing right now will disappear along with it.

Historical Price Comparisons

The full historical chart for Bitcoin, neglecting inflation, looks like this at the moment:

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(Source code for the visualizations — IPython notebook)

I see 4 places where the price went through dramatic increases. In 2011, early 2013, late 2013, and now. Grouping the 2013 price movements together, we get these min-max ratios:

Key Rapid Growth Periods

2011: $0.05 — $30 (60,000%)
2013: $5 — $1200 (24,000%)
2017: $600 — $5000 (830%)

After each rapid growth period, the price has always remained significantly higher afterwards compared to before. On the other hand, if you had bought high e.g. $1000 in 2014 you would need to sit on your losses for 3 years to break even again.

Below, we directly compare the three periods of rapid price changes in units of days, rescaling the y-axis to a fraction of the max price during that time.

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The 2011 spike in blue (up to $30) came and went very quickly. As the market cap grows we are seeing this process take longer. The 2013 price increase happened just about as rapidly, but the following pullback took quite a lot longer to play out.

This good news for the current price, where we would expect to see even more drawn out pullbacks. We might be at the start of a long pullback right now.

If following previous trends more closely, the 2017 price run-up would have capped at $3000, but this time it was different. It bounced up instead and tore it’s way to $5000.

Conclusion

Yet the voice whispered it again (different this time mayhap different)
- Stephen King, The Dark Tower

The double run-up was something we didn’t see last time on the proportional timeframe. This is consistent with the idea that hyped price action trends proportionally with the market cap of Bitcoin. In other words, it will take longer for the bubble to grow and shrink this time because the market cap is huge.

Do I think $5000 was the max and it’s RIP for another few years?

No.

I expect the hype to continue and news to have huge impacts on the price for at least the next year. If we can get enough positive news at the right times, there is no doubt the bulls will see blue sky breakout territory again and push to new all time highs.

If and / when it falls, I don’t expect BTC to be traded for less than $1,000 in the years to come.

Certainly if the previous trends continue, even with the declining percentage gains, the space will gradually see increased adoption and larger market caps. This will be a natural effect of:

  • An increasingly large number of tech savvy young people discovering crypto
  • Advancements in cryptographic decentralized technologies

If you are interested in Bitcoin long term, buying now would not be a bad idea. The reason I say so is because we might see the price break $5000 soon, at which point your long term investment may have become much more expensive.

On the other hand, if you are looking to maximize on the next 10x spike (if history repeats itself again), then you should probably be very patient for the next 2-3 years while the hype dies down and the price consolidates.

Thanks for reading 👏,

Message me on twitter here if you want to chat:

This is not investment advice.

Written by

Python Data Engineer, MSc. Physics

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