Turn on Bloomberg TV, open the Wall Street Journal, or read the FT. Financial experts from London to New York are calling Bitcoin the biggest bubble in the history of modern economics. Comparisons are made between the tulip mania in the 17th century, the financial crisis in ’07, or the famous Dot-com bubble. The amusing part of these comparisons is that they are short-sighted and often wrong. Bitcoin might not be the so-called ‘biggest economic bubble in history’.

Let’s start with why these comparisons are wrong. The financial crisis in 07′ is by far the worst comparison. In 07′ the US housing bubble bursted. As everyone remembers, it resulted in a global economic crisis and financial trouble in a lot of places. This bubble however was created by banks, financial institutions and credit rating companies like Moody’s. The financial product that they created out of thin air we’re absolutely idiotic. It meant letting ordinary people invest in junk housing bonds with AAA ratings. Of course this is a major simplification, but these products where so advanced that even their creators often did not understand them. That was also the problem, the complexity of the products also meant that they could never ever foresee the impact that their thin-air product might have.

Then there is the Dot-com bubble and the tulip mania. These comparisons are already way better then the comparison with US housing bubble. But the fact remains that these comparisons are quite short-sighted as well. The Dot-com bubble was also based on products: stocks, that we’re incorrect. Buyers believed they were buying into companies with big opportunities. They could have not been more wrong.

The same problem existed during the early 17th century. In this period the famous tulip mania took place. Prices of tulip bulbs skyrocketed. Until eventually the bubble bursted. The problem with this comparison, although it’s for a big part very comparable, is that tulip bulbs can be created. It’s quite simple, here in The Netherlands it happens by the thousands, if not millions per year.

Why Bitcoin is different

The problem with every one of these bubbles was that either the products were fraudulent, or that supply could be increased. These problems don’t exist with Bitcoin. Bitcoin is in it’s essence not fraudulent. It’s technicaly spoken maybe even the best form of money to have ever existed. Because the chance of new Bitcoin being created is 0. The maximum amount of Bitcoin that will ever circulate through global markets will be capped at 21 million. This was not the case with tulip bulbs. Tulips bulbs can be grown, supply can grow to meet demand.

Then the fraudulent part. Many financial experts call Bitcoin a ponzi-scheme. A pyramid of fraud. This was definitely the case with the derivatives sold in 05′-07′. With Bitcoin this is however not the case. Bitcoin however is not a crazy advanced financial product. It’s plain simple. The moment you hit buy, you receive a incopyable coin. That’s it. This also means that even when people start to sell, the product will be sustained. This was not the case with the derivatives. The market for MBS for example could not sustain the big sell and products collapsed. This is not possible with Bitcoin.

So, the Bitcoin doesn’t have any of the financial weakness of the other bubbles. This means that the only way Bitcoin prices will drop is when people start to sell. But wait, doesn’t this happen in every market? Yes indeed, the Bitcoin market is actually the most basic form of economics. It’s just supply and demand. Because BTC supply is limited, and demand is growing, prices will rise. This happens in every market, whether it’s oil, gas, stocks or any other product or commodity.

But will the price go down? Maybe it will. However the total value of the world’s capital is $90.4 trillion. This is cash that’s on bank accounts, bank notes or coins. Even if just a little amount of the global cash flows will move to Bitcoin, which will result in higher Bitcoin prices. And the arguments to move cash flows to any form of cryptocurrency are strong. It’s technically superior and arguably easier to use.

Conclusion

Bitcoin prices are high. But to call it a bubble is incorrect. Bitcoin is a very understandable product, and doesn’t have any financial institutions who can create idiotic financial products with it. Maybe the price is high, and maybe it will rise. It can also go down. And these two possibilities are just simple economics. Calling it a bubble is unwise. Because it’s not. It’s economics.

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