The rapidly rising prices of Bitcoin are concerning some into believing there might be a “Bitcoin bubble” that’s about to burst. This theory is grounded in the rising price of Bitcoin over 30% in the past month alone and over 100% in the past year. Recently it crossed the $1,200 mark and this is troubling to some monitoring. This piece takes economic supply and demand pricing strategies and tries to apply a few of the models to Bitcoin. The majority of normal goods, those that are purchased more as income increases, have a downward sloping demand curve and most models suggest that prices will fluctuate until they reach the equilibrium. This article suggests that there’s potential for another model, the “Theory of Reflexivity” whereby the demand for a good increases as prices increase due to other causal relationships such as normal economic booms and busts. These two conflicting models question what is causing the increased prices of Bitcoin. There’s evidence to suggest that the increased awareness is driving up the price but along with this, the quantity of trades haven’t gone up at the same rate. Though the article continues into great detail about many other sides of analysis, I found the economic model perspective the most interesting and defensible. I believe that Bitcoin has potential to be a bubble that bursts but I’m not sure it’s at it’s peak yet.
http://www.pbs.org/newshour/making-sense/column-boom-bitcoin-bubble-thats-burst/
Great article. The growth of Bitcoin’s value last year was astonishing and scary, but, to some extent, it reflected investors lack of confidence in physical assets, such as gold.