How do Bitcoin Bubbles Work?

bitcoin bubble

After looking at the chart and calling bitcoin as bubble is a favorite pass time of crypto skeptics. However, economists understand that bubbles are complex things that cannot be recognized without fail before they pop.

According to US economist Hyman Minsky, a bubble has five stages: displacement, boom, euphoria, profit-taking, and panic. If Bitcoin is a bubble, it is at the profit-taking stage with the panic stage just around the corner, Joost van der Burgt, a policy adviser at the Federal Reserve Bank of San Francisco, wrote in a recent paper called “Making Sense of Bitcoin Price Levels”.

The displacement phase was after the release of the coin’s whitepaper in 2008, according to him. Back then, very few people knew about Bitcoin, and trading volume and price were small – the first time Bitcoin broke through USD 100 was in 2013, four years after its inception.

Van der Burgt writes that the next stage, the boom, was obvious: “The subsequent ‘boom’ phase is characterized by prices rising slowly at first, but then gaining momentum as more and more participants enter the market, fearful of missing out.”

Euphoria comes with the hype remaining even as the prices lose their volatility: “The euphoria phase is also when people start to borrow extensively to finance their investments. According to a recent survey, 18% of active bitcoin investors have financed their investments by credit card, and 22% of this group indicated that they have not yet paid off their credit card balance,” he explains.

This means now is the profit-taking stage, where savvy investors leave, preparing the ground for the panic stage which would see prices crashing. It may not come to pass after all, however: “Then again, maybe bitcoin is different than anything we have seen before, and maybe a decade from now its market capitalization will be sky-high as it attains the status of a new global currency.”