Is bitcoin a bubble ?

posted in: Technology | 0

Bubbles are hard to determine when you are in the midst of them.  Part of the problem lies in that the products that tend to bubble up are often radical and new.  This virgin territory makes it hard to gauge  their worth.  In an attempt come to a valuation, analysts tend to create new valuation metrics.  For instance, in the internet bubble of 2000, companies were being valued not by cash flow or earnings, but rather page views, unique users and clicks. It was a new world and a new way.  Fast forward 13 years later and these businesses are back to being valued by more traditional means again.  This leads us to bitcoin, the new kid on the block.  What is bitcoin ?

According to wikipedia , Bitcoin is an open source peer-to-peer electronic money and payment network introduced in 2009 by pseudonymous developer “Satoshi Nakamoto”.  Bitcoin has been called a cryptocurrency because it uses cryptography to secure transactions. Digitally signed payment messages are broadcast to and verified by a decentralized network of computers all over the world. Specialized computers use a proof-of-work system to prevent people from copying and spending the same bitcoin multiple times, a problem for digital currencies known as double-spending. The operators of these computers, known as “miners”, are rewarded with transaction fees and newly minted bitcoins.  Now that we have told you what bitcoin is you are probably wondering where is it traded.

Bitcoins are bought and sold at a variable price against the value of other currencies and trade on non traditional exchanges such as Mt.Gox, the world’s largest bitcoin exchange.   As illustrated in the chart below, in U.S. dollars, 1 bitcoin is trading at nearly$1,150  U.S greenbacks.  Now while we may not know if bitcoin has hit its feverish, frenzy top – one thing is clear: the chart has gone parabolic.  And when it inevitably pops you don’t want to be the last guy or gal scrambling for a chair in the game of musical bitcoin !

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Adding a little further evidence that bitcoin may have become a fevered, mad rush that often presage a top – we present the google trend graph below for the search term “bitcoin.”  As illustrated, it has exploded into the stratosphere, suggesting to us there is wild speculation in the bitcoin market at the moment. Wild speculators tend to be the least informed and last buyers.  The buyers who get in at the top, because everyone is doing it- so bitcoin buyers … be warned !

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