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Since its launch in 2009, there have been numerous predictions that bitcoin is a bubble waiting to burst. More than 10 years later, it has gone from strength to strength as the bubble is yet to come.
Created by Satoshi Nakamoto (Remains anonymous to date) Bitcoin introduced us to the era of cryptocurrencies. These are currencies powered through blockchain and exist in a decentralized form.
Satoshi envisioned a future where it would act as an alternative currency to traditional money. Through decentralization, Satoshi made it possible for Bitcoin to exist without any central control point.
Initially, the majority of analysts dismissed Satoshi’s idea as mere imaginations. Having an alternative to fiat money seemed “crazy” if not impossible at the time.
Today, Bitcoin has become a household name across the globe. Investors are pouring in huge amounts of money trying to acquire some peace of it. In this path towards dominance, Bitcoin has been termed as the biggest wealth maker of the decade.
Despite this success, some critics still believe the whole concept and pricing of Bitcoin is a bubble that could burst any time. Hence, is bitcoin a bubble?
To answer this question, you need to understand if it has succeeded in fulfilling the role it was created for. Below are some of its characteristics.
Volatility has remained a key challenge facing Bitcoin. This has kept most large-scale investors away. Price volatility makes an investment asset risky and unpredictable. A key example is the volatility experienced in 2018 when the value of bitcoin fell by over 65%.
Volatility has made it difficult for it to succeed as a transactional currency. Merchants have stayed away from accepting payments in bitcoins due to these price movements. Without predictability and stability, it will be difficult to market bitcoin in the long term.
Limited Real-life uses
Several attempts have been made to make it usable in day-to-day transactions. This however seems to fail due to various reasons such as a low number of bitcoin supply.
During creation, Satoshi put a cap on the number of bitcoins that could exist to 21 million. This supply is inadequate to support a transactional currency.
In a world with over 7 billion people, this supply can’t supply demand. This means there might never be enough coins to support the transactional functionality of bitcoin.
Bitcoin is not only competing with its fellow cryptocurrencies but also the traditional fiat currencies. Although it is the market leader among cryptocurrencies, its influence is insignificant compared with fiat currencies.
The expected market dominance hasn’t materialized so far. Without a sizeable transactional market share, it will be impossible for it to retain the upward trend indefinitely.
With an average cost of $55 per transaction, bitcoins remain very costly in comparison to their competitors. These high fees remain an inhibitor to the acceptance of Bitcoin. In the long term, this could diminish its viability setting it for a potential failure.
A typical bitcoin payment confirmation timeline is 10 minutes. In comparison with other transactional channels, this is too slow making it uncompetitive.
These slow speeds have made it unattractive to both retail users and merchants. Take an example where you transacting in a supermarket and each customer has to wait 10 minutes for transaction confirmation.
If the status quo, Bitcoin has a probability may never gain acceptability as a transactional currency.
Unless there are interventions to make the transaction process affordable and faster, the probability of Bitcoin competing with the normal currencies remains low and unrealistic.
Bitcoin has largely operated in an environment with little or no regulations. This has been a big contributor to its recent growth. However, Regulators are starting to get involved as the industry grows.
After its valuation hit the $1 trillion mark, there were concerns about the safety of investor funds. These regulations have mostly focused on the trading platforms and mining companies.
As a competitor to the government-controlled money, there is a likelihood of resistance through regulations from governments. This is already happening as some countries have already restricted its use while others have banned it in totality.
China is a key example of how regulators could influence the future viability of bitcoin. It has experienced a 50 % price drop in recent days after china banned trading and mining of cryptocurrencies. This fall could be attributed to the fact that the huge percentage of bitcoin mining used to happen in China.
Central bank digital currencies (CBDC)
There is a new trend whereby governments are creating their digital currencies referred to as Central Bank Digital Currencies. These currencies compete with decentralized currencies.
Governments are likely to support their own controlled central bank Digital Currencies in place of the traditional cryptocurrencies. In the long term, this threatens the existence and viability of bitcoin as an alternative currency.
As an online digital currency, Bitcoin remains vulnerable to the challenges posed by cyber-attacks. There have numerous attacks in the recent past on cryptocurrencies and platforms hosting them.
These attacks have grown exponentially as more people use cryptocurrencies. Due to cybersecurity risks, it remains possible waking up in the morning only to find your bitcoins gone. This risk remains a key barrier in growing Bitcoin usage.
Mining is the process of creating Bitcoin. There has been criticism in this process due to the amount of power needed to sustain.
This excess usage of power is being linked to the global climate effects as some of the miners rely on fossil fuels. Due to these claims, there is a consistent global campaign by climate activists and celebrities to stop the use of Bitcoin.
These claims remain a threat to the existence of Bitcoin in the future. This pressure could force the government to create and enforce anti-crypto regulations. Today, some of the leading global companies have ceased using bitcoin for transactions.
Though these claims remain unsubstantiated, a real threat exists if the ongoing audits confirm them to be true.
The probability of the bitcoin bubble bursting remains real. However, it is too early to conclude when this could happen. So far, criticism remains just as such as it has been on a meteoric rise. However, if you carry out a deep dive on the key fundamentals, the threat of failing remains.