Ever since bitcoin rose to massive heights in 2018, we have seen a consistent rise and fall in its value. It volatility is what makes investors excited and worried at the same time. We have seen the crypto currency rise to almost $60,000 and then drop to lower than $28,000. Many people experienced a massive loss in the process. A simple comment by an influential individual can sky rocket prices in a matter of weeks and can also plummet prices in a matter of days.
Large investors are rumored to be controlling prices by huge buying and selling. Since price of bitcoin relies on supply demand factor. However, such growth has piqued the interest of both hopeful observers and sceptics, raising voices in both traditional finance and the cryptospheres. Believers and supporters are watching the scenes unfold with eagerness, while cynics and doubters are labelling it a dangerous bubble. Both sides are making a lot of noise, but which side is correct?
For me though I believe bitcoin is just a bubble waiting to burst and here is why:
There's only a tiny bit of real-world utility.
One of the most significant disadvantages of digital currency is that it is nearly useless outside of a cryptocurrency exchange. Despite the fact that a tiny number of high-profile corporations or organisations have accepted Bitcoin or Dogecoin, the total number of businesses accepting either is negligible. After eight years, approximately 1,300 businesses worldwide have opted to accept Dogecoin, while Fundera discovered that 15,174 firms accept Bitcoin as of December 2020. To put things in perspective, there are an estimated 582 million entrepreneurs in the world.
The valuations made no sense in relation to the transaction data.
Even if valuation is subjective, a quick look at transaction data for the three most prominent cryptocurrencies in comparison to payment processing behemoths like Visa (NYSE:V) and Mastercard (NYSE:MA) will leave anyone's jaw on the floor.
According to the latest Nilson data, 1.01 billion credit transactions were processed daily in 2018, with Visa and Mastercard handling 700 million of them. By comparison, the blockchains of Bitcoin, Ethereum, and Dogecoin each process around 300,000, 1.4 million, and 50,000 transactions per day, respectively. Even though the processing power of all major cryptos combined isn't even close to that of Visa or Mastercard, the Big Three of crypto have a bigger combined market worth than Visa and Mastercard. That is illogical.
Blockchain adoption has been slow in the business world.
On paper, blockchain appears to be a fantastic technology. On the financial side of things, it's a means to speed up payment validation and settlement. Instead of taking up to a week to settle cross-border payments, they may be completed in seconds or minutes. Non-financial uses are also possible with blockchain. The Ethereum blockchain, which is powered by smart contracts, could one day be the key to breaking down supply chain bottlenecks.
What seems good on paper, however, does not always translate to real-world success. Blockchain is still stuck in a Catch-22 situation. Businesses will not accept it until it has been proven on a large scale, but no business will abandon their existing (and established) infrastructure to act as a guinea pig. Big business will stay away from blockchain until it matures.
There isn't much of a barrier to entry.
Apart from the lack of utility, Blockchain Coders main issue with crypto is that there is no entry barrier. Anyone with access to a computer and the will to code can create a blockchain and, perhaps, a tethered token. CoinMarketCap claims to have around 10,000 distinct cryptocurrencies in its database. While many aren't actively traded, there are a staggering amount of possible competitors to Bitcoin, Dogecoin, and Ethereum, with many more on the way. In short, an infinite amount of competitors is constantly entering the crypto sector.
Centralization is not really there
Decentralization is one of the many purposes of cryptocurrencies. This is to ensure that a network is not controlled by a single individual or a small number of people. However, according to BitInfoCharts.com, Bitcoin and Dogecoin ownership is fairly consolidated. Only 2,155 addresses own about 42% of all Bitcoin, and only 99 addresses control 66.6 percent of all outstanding Dogecoin. It's possible that people are realising that these financial experiments aren't as decentralised as they should be. It also means that if the majority stockholders sell, the stock's value could drop in an instant.
A Tweet can do much damage (Elon Musk)
One more reason that the crypto bubble is bursting is that it was inflated artificially by Tesla CEO Elon Musk's comments. Musk was initially enthusiastic about Bitcoin. In February, he purchased $1.5 billion in Bitcoin for Tesla's balance sheet, and a month later, the business announced that it would begin taking Bitcoin for electric vehicle purchases. Then, after 49 days, he announced on Twitter that Tesla will no longer take Bitcoin due to the negative environmental effects of mining it. He's since shifted his focus to Dogecoin. The fact that meaningless tweets are producing and erasing hundreds of billions of dollars in crypto market value suggests that a bubble has been cooking for some time.
Not all countries are accepting cryptocurrency.
Some countries aren't happy with cryptocurrencies undermining their own central bank-backed currencies, thus the crypto bubble is bursting. China caused the crypto market to go into a tailspin last week when it announced that banks and online payment channels in the nation would no longer be able to provide any services linked to the cryptocurrency business. It's worth noting that China is home to a significant amount of Bitcoin mining. China is far from alone in this regard. Turkey recently approved legislation prohibiting cryptocurrency payments. Meanwhile, digital currencies have been essentially prohibited in Bolivia, Ecuador, Nigeria, and Algeria. The worldwide use case for crypto is becoming increasingly unlikely as a result of this trend.
There are no real-world correlations that can be identified.
Another issue with crypto is that there are no obvious real-world parallels. We know, for example, that gold and the United States currency have an inverse connection. When the dollars value falls, gold is most likely to rise. This is a long-term relationship that has been established.
These correlations do not exist in Bitcoin, Ethereum, or Dogecoin. Crypto enthusiasts want to point out how crypto is a hedge against inflation, but they forget that Bitcoin has risen and dropped in value depending on how quickly or slowly the money supply expanded. Because cryptocurrency has no real-world linkages, it is driven by emotion and technical analysis.
Investors Over-Hype New Technologies for Profits
Investors usually overestimate the speed with which new technology is adopted. Despite the fact that there are a lot of individuals excited about blockchain, it's been more than a half-decade and the euphoria hasn't translated into real enterprise use. Every next-big-thing technology needs time to mature, and crypto is no exception.
The Bottom-line
Although, most things are pointing to the obvious that bitcoin is a bubble ready to burst. But, you never exactly know what may happen. If certain things change like more people accepting crypto payments, countries readily adopting the currency and if the currency is more evenly distributed(a few addresses has more than half crypto for most currencies). Then the future can look bright, but for now it seems like a risky investment and a short term opportunity. Buy low and sell high, the future of bitcoin though seems to hang by a thread.
Its decline or success will ultimately be determined by the people who use it and how willing they are to use it. If in the future, more users, countries and businesses come on board the currency may last a long time. If that is not the case, then it is more than likely to fail.
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