If you would have invested ₹20,000 in Bitcoin in the year 2015, that value would have become ₹37,00,000 by now. There’s a return so large it doesn’t even make sense writing it down as a percentage.
The cryptocurrency was the asset class of the decade as it surged unprecedently giving its investors a return they couldn’t have imagined in their lifetime. The last decade was quite turbulent in the financial markets and the emergence of Bitcoin may have disrupted other traditional forms of investments. Some factors that might have contributed to the outperformance may include irrational investor sentiments and low barriers to entry into the market.
But the question over here is – Is the Cryptocurrency headed towards another financial bubble?
Bitcoins are just finite pieces of data and it is the market for this data that commands the price of the Bitcoin. Therefore, it has no price of its own. This is something that cautions the investors since everyone wants to know the intrinsic value of a security before investing in something. There is a theory of a 4-year cycle that Bitcoin follows where the price rises to a new all-time high, after which it declines to the highest price of its previous four-year period but it never crosses it. The reason for it stands as the Bitcoin prices jump, it grabs media attention and new investors get into the line whereas old buyers find opportunities and cash out from the same.
Due to its unregulated market and irrationality, it has attracted criticism and has almost been classified as a speculative asset class. Cryptocurrency has already been a part of a major bubble in the year 2018 when it lost more than 65% of its value due to the failure of Initial Coin Offerings (ICO) and loss of confidence by the investors.
However, there has been a paradigm shift in the digital currency market since the 2017 crisis. The most important factor is the interest of Institutional investors. The year 2017 was characterised as a gold rush as huge crowds of people were interested in purchasing the currency. However, today we see that major corporates like Tesla, MicroStrategy, SkyBridge Capital, etc. have invested hugely in Bitcoin. Companies like Microsoft and Rakuten have actually started accepting payments in Bitcoins too. The advent of sophisticated technology and the rise of digital currency are some factors fuelling the same. Major fintech companies like PayPal and Robinhood have made it easier to purchase Bitcoin and certain chartered banks have been certified to provide custody services to keep the Bitcoins of their clients safely.
The listing of Coinbase, the largest US cryptocurrency exchange has further aided the development of an open financial system built using blockchain technology. Investors looking to ride the crypto wave also have an opportunity by investing in the shares of Coinbase. Moreover, the market for Bitcoin futures and options contracts has made it easier for investors to gain exposure towards the asset class.
There are various other factors including its limited supply of 21 million coins, its increasing use as a store of value, its acceptance as a means of payment, and a more regulated and transparent system contributing to the stability of the cryptocurrency and that distinguishes it as a safe haven market.
Bitcoin has a history of bouncing back after a series of crashes and this is something that provides solace to investors as they invest huge amounts in the currency. Investors have made peace with the intense volatility and irrational behavior of the markets, and this has overshadowed the crashes faced during the period.
Therefore, there are different views based on the subject as investors, fund managers, and analysts try to analyse the future of Cryptocurrency. Its comparison with asset classes like gold and early internet stocks doesn’t fit the matter because of the vast differences between their characteristics. With the Dogecoin saga predicted to cause a major financial bubble, suspicion has arisen in the minds of the investors. It is certain that Bitcoins aren’t for the faint-hearted as continuous movements and irrationality prevail all over the market. Therefore, it will be interesting to see the future that the cryptocurrency market will bestow upon the financial world.
In my opinion, the cryptocurrency might have appreciated to unprecedented levels with a unit costing about ₹37 lakhs but there’s still scope for growth and it doesn’t call for a financial bubble. With the entry of institutional investors and the future of digital payments, cryptocurrency might have a huge role to play. There might be continuous dips and rises in the levels owing to the intense volatility of the instrument, but that is something that provides it its essence.
