Is Bitcoin a Bubble or the Pin That Will Burst Bigger Bubble?

Everybody is interested in which is a real bubble among the strongest currencies currently: Bitcoin or the U.S. dollar. The problem has been especially acute since Bitcoin was called a “bubble”. It’s hard to argue the fact that its price has risen significantly — up to 1,800 % since its launch. Let’s take a look at which one is the real bubble, and why.

Bitcoin Volatility Index

The rise in the number of cryptocurrencies on the market has made the cryptocurrency world more democratic than the world of fiat currency, where everything is based upon the decision of a few. Let’s consider the significant increase of Bitcoin at the end of last year when its price reached its maximum: U.S. $19,339.92. This served as the main reason for calling BTC a “bubble.” But wait — there’s more! People should ask themselves why, in the world of classic vehicles, stocks, bonds, fiat money, and other precious things, this “bubble” appeared. What does it mean? It’s a worrying sign of a potential crash in the traditional financial system, which consists of debt and credit.

Bitcoin Price History

Which Factors Impact the Price of BTC?

The price of BTC is specified by the rate of the U.S. dollar (BTCUSD), the Chinese Yuan (BTCCNY), and the Euro (BTCEUR). However, the official BTC price is unknown. It is based upon various averages specified by global exchanges. Among them are the most significant exchanges: Bitcoin Average and CoinDesk. BTC is traded in different ways and can differ a little in price on other exchanges.

Supply and Demand

As with any other product, the price of BTC depends upon the interaction of supply and demand. Price appears to be at the intersection of these two indexes. Therefore, the supply of BTC depends upon the first owners and miners. Satoshi Nakamoto established that Bitcoin’s supply wouldn’t exceed 21 million. If he decided to throw away all of the coins on the market, that would destroy the price because of the supply’s surfeit over demand. It’s the same with holders who have a significant percentage of the overall amount of BTC. If they throw out this amount of BTC on the cryptocurrency market, its price would fall.

Currently, the mining reward is equal to 12.5 BTC. The Bitcoin inflation rate is 3.84% annually. In 2020, this rate will decrease, and the block reward will be divided in two. In spite of such a high level of inflation, the price of BTC is going to rise. It rose when the block reward was equal to 50 BTC. This speaks to strong demand. On a permanent level,people are buying a huge amount of BTC.

According to the latest Google trends, people’s interest in cryptocurrency is rising constantly. Their interest in Bitcoin refers to its price, and forms a feedback loop. The history of BTC, during which the cryptocurrency went through at least two such cycles, demonstrates its high level of protection against inflation and devaluation.

Bitcoin Hype Cycle

What Causes Mass Interest in Bitcoin?

Apart from its implementation in different areas of people’s lives and its significant impact on the technical and economic world, other factors have put wind in Bitcoin’s sails. Among them are banking blockades and fiat currency crises. Julian Assange forbade the acceptance of BTC until the middle of 2011. This situation demonstrated that Bitcoin’s price is resistant to censorship.

One of the brightest examples was the late 2010 WikiLeaks banking blockade, when the biggest global payment systems, including Western Union, VISA, and others refused to process investments to WikiLeaks.

Additionally, it is worth mentioning the darknet drug market. When Silk Road, one of the most popular drug platforms, was closed, the drug trade continued with BTC. It also caused public attention to be directed at the cryptocurrency, even by people who wouldn’t normally have paid attention to it.

Huge interest in Bitcoin was also brought by a high level of safety of the BTC wallet. Citizens of Cyprus realized it in early 2013 when their savings were confiscated. This served as one more reason to use Bitcoin instead of fiat money.

The Greek crisis in 2015 also played a very important role in the growth of BTC’s popularity. When a daily withdrawal limit was established, people thought of other payment methods uncontrolled by any central authority.

After this crisis, the Chinese Yuan started devaluing. That’s why holders of cash decided to store their savings in a more reliable currency.

Fiat currency crises

The Pitfalls of Fiat Money

Fiat money resembles elderly people who have difficulty accepting change. According to the research of Alice Leng, Bank of America Corp, currency trading reacts less to market shocks, and if a reaction appears, it doesn’t last for a long time. This is why the U.S. dollar seems to be less volatile than cryptocurrencies. But fiat money isn’t as stable as it seems to be.

As Vitalik Buterin, co-founder of the Ethereum network, stated on Twitter, the U.S. dollar is a hyper-volatile currency that has dropped 96% since 1913. In order to find out which currency is the real “bubble,” let’s consider the history of fiat currency and learn about its volatility.

How to Check the Rate of Inflation of the U.S. Dollar

The best way to recognize whether a currency is volatile or not is to check its index. This indicator allows tracking of the value of one currency compared to others. To track the volatility of the U.S. dollar, Applicature would like to look at the inflation rate of the U.S. dollar over the course of its entire existence.

The price of the U.S. dollar has increased by 2,900.45% since 1900. When it comes to the average inflation rate, that’s equal to 2.92% annually. In other words, $100 U.S. in 1900 equalled around $3,000 U.S. in today’s dollars. Additionally, its price rose 30 times higher over 118 years. The inflation rate in 1900 was 1.20%, and now it’s 2.18%. $100 today will be equal to $102.18 in 2019.

The Rate of Inflation of the U.S. Dollar from 1985 to 2018

Let’s take a look at the graphic below, which shows the U.S. Dollar Index (USD) from 1985 to 1995.

Here, you can see the USD index for 1985–1995. From 1985 to 1987, there is a price drop that was caused by the repayment of debts to Latin America. During that period, the price of the dollar decreased from U.S. $124.99 to U.S. $85.42. That is equal to 31.7%. During the rest of the decade, the currency value index gradually increased.

Now take a look at this graphic, which demonstrates inflation of the U.S. dollar from 1995 to 2005.

You can track the drop in the price of the U.S. dollar from January 1, 2002 to December 2004. During this period, the U.S. dollar index fell 32.8%, from U.S. $120.28 to U.S. $80.85. This period was characterized by the dot-com boom.

From 1995 to 2000, a lot of Internet stores reached their maximum in value before their crash. The burst of the dot-com bubble was from Spring 2000 to Autumn 2002, when a huge number of companies including Pets.com and others, failed. Among the most popular online stores, Applicature can point out Cisco, whose losses reached 86 percent, and Qualcomm, which lost a great deal, but survived.

The last period that experts recommend considering is from 2005 to 2018. During this time, you can notice the most significant change in volatility from November 2005 to March 2008. This was the period of the last global financial crisis. The U.S. dollar index fell by 23%, from U.S. $91.57 to U.S. $70.53.

Bitcoin’s Immunity From Inflation

Experts state that the first reason for calling the U.S. dollar a bigger “bubble” than the cryptocurrency stems from Bitcoin’s immunity to inflation. The main reason for this is its limited supply. When the first BTC was mined, Satoshi Nakamoto established its supply to 21 million BTC. That’s why Bitcoin is protected from the inflation that threatens all national currencies, inflation rate of which depends upon the increasing amount of printed money issued by the Treasury.

Experts state that the U.S. dollar is more of a bubble than Bitcoin because nobody knows how many U.S. dollars have been issued. One BTC is still worth one BTC. And the amount of U.S. dollars that one BTC is worth depends on the inflation of fiat currency. It’s an important question: is Bitcoin worth more in U.S. dollars because of its upturn, or in terms of the dollar’s fall?

Conclusion

Comparing the U.S. dollar and Bitcoin, the big question is, which one is the real “bubble?” The U.S. dollar’s inflation rate is equal to 2.92% annually. Every year, it devaluates. $100 in 1900 is worth around U.S. $3,000 currently. The U.S. dollar demonstrates a high level of inflation in spite of its high level of volatility. At the end of 2017, the price of BTC reached its maximum of U.S. $19,339.92. It then started falling but survived.