An analysis of the bitcoin altcoin bubble

Summary

• Bitcoin has been growing in value since its inception, skyrocketing since the start of May 2017
• Asset bubbles form when a majority of people hold a lot of an asset as an investment
• As a result, bitcoin is current not functioning like a currency
• There are floors in the block chain technology being used as a currency
• Since bitcoin is in a bubble, most alt coins are in a bubble

Introduction

Upon writing this blog, Bitcoin has gone from $1974 USD from the 1st of January to $13,100 USD from the date of posting this blog. That is a 19.6 times increase in price. Other alt coin have increased to match bitcoin's rise. A lot of financial commentators believe bitcoin is in a bubble, and the price of bitcoin will burst sometime soon. This blog will discuss the price history of bitcoin, how asset bubbles form, the bitcoin bubble, bitcoin is not a currency, bitcoin as a store of value, the floors of the bitcoin block chain and other alt coins bubble.

Summarised price history of Bitcoin

Below is a summary of the general bitcoin price movements since its inception.

• Bitcoin originally released in July 2010 at $0.08 USD per bitcoin.
• From July 2010 to around October 2013, the bitcoin price rose from $0.08 to $183.
• From October 2013 to Early December 2013, Bitcoin's price rose rapidly from $200 to around $900 USD. The reason for this is due to investors from China pumping and dumping bitcoin.
• From December 2013 to around August 2015, the bitcoin price dropped from around $900 to around $230. 
• From August 2015 to May 2017, Bitcoin's price rose from around $230 to around $1,495.
• On the 1st of April 2017, Japan legalised bitcoin as a legal form of payment. Causing a massive jump in the price from 1st of May 2017 when news started to spread about Japan legislating bitcoin.
• Throughout the year, bitcoin has been increasing in value from around $1,495 in April 2017 to around $6,778 in October 2017. Bitcoin has had two major "correction" to get there in July, September and November.
• Since October, bitcoin has increased form around $6,778 to currently $18,895 with almost no correction. 

How asset bubbles form

The general growth if an asset bubble is shown below.

1. The people who generally invest here are small groups of investors who have heard of the asset, and people excited for the projects that a certain cryptocurrency is associated with.
2. Here is where you get investors who want to get on board and learn about the asset start buying the asset. Some are there because they are excited about the projects, others are investing just to make money.
3. The final phase of growth, this is when the news of the asset goes mainstream, and people who have no idea about the asset buy it. The most likely reason they will buy the asset is either; to make the gains that the investors who invested in phase 2 made, or the fear of missing out of any gains made. Unfortunately, most of the people who invest have no idea about the cryptomarket.
4. Most likely in this stage, people who have invested from phase 2 and 1 will sell their assets. The massive increase in supply that these investors sell to the market drags down the price. In the case of cryptocurrencies, that will mean the price will decrease, and those who invested at part 3 will be selling off due to the sudden shock of decrease price.
5. Either one of two things are most likely to happen at this point. Firstly, the price could go below the mean then to the mean before the hype. Second, the price will collapse due to the lack of confidence of the asset with the market. 

The bitcoin bubble

From the 22nd of December, it is fair to say all cryptocurrencies are in a bubble. A bubble occurs when the price of an asset has been inflated in some way. Most of the time, it is human excitement. For example the .com bubble and the tulip bubble, were mainly fueled by human excitement for those assets.

If you look at bitcoin from a supply and demand perspective. Demand from bitcoin's inception has probably increased due to two factors; the excitement for the block chain technology and the fear of missing out. The fear of missing out is due to the multiples initial investors have made on their money, and that the bitcoin price continued to increase.

This demand exponentially increased in May 2017 due to the Japanese government legalizing bitcoin as a trading currency. This created two demand in the cryptocurrency economy. Firstly, it created a demand for people to access this new type of currency, increasing the demand for exchanges such as BTCmarkets.com, Coinbase, Coinspot and Bittrex. Secondly, it increased the demand for bitcoin due to its spread into mainstream. From May 2017, the demand for bitcoin has exponentially increased. However, the supply of bitcoin has remained almost unchanged. Due to the demand for a bitcoin increasing the price, people have begun holding onto the bitcoin, rather than spending it like a currency. Holders of bitcoin expect it will continue to increase in price in the future.

This is where it has hit the current market cap and price shown below.

 What will crash the cryptomarket? Generally for a bubble to burst, two aspects must be true.

1. Those bullish on the bubble must not believe it is in a bubble.
2. A sudden, unexpected event must occur to shake the market's confidence in the product.
   

Bitcoin is not a currency

This is where the problem truly lies. Bitcoin, and other cryptocurrencies are no longer treated as currencies, but as stores of value. A healthy currency is one where the currency is exchanged often for transactions between two buyers. However, these cryptocurrencies are being used as a store of value. Since there is no central body to manage their supply and demand, it is essentially used now an asset, not a currency. The fact that transaction costs are now currently at $55 USD, there seems to be much less of a desire to use bitcoin as a currency.

So this begs the question, where does the value of bitcoin come from?

Bitcoin as a store of value

With shares, you will get a dividend every six months from the company that the shares are associated with. With a bank bond or a treasury bond, you will get a the value of the bond back plus interest at the end of a certain period. Gold is also a good store of value, as it does not rust, and gets its value from its scarcity, and use within jewelry and electronics.

With bitcoin, the only money you get back, is that someone else is willing to pay for the product at a higher price than you bought it. You do not get a dividend, and if anything, you may get some free coins from a fork of bitcoin. Other cryptocurrencies such as NEO you get some GAS from.

The floors of the bitcoin block chain

Bitcoin is not used for any other purpose. The only real value that comes from it is the technology behind it, the block chain.

Block chain is essentially a legislature of every transaction that has ever occurred with a bitcoin. Every few months, miners must make a legislature of every transaction that is made through bitcoin. Whoever completes the block chain first, or has completed the chain with the most complexity, will be given bitcoins as payment.

Fatal Floors of the block chain are listed below.

1. It only matters who calculates the block chain fastest, not who has the right set of block chains.
   Many people are trying to calculate the bitcoin block chain faster than other people, because it only matters who's block chain has been calculated fastest, not who's block chain is correct. In the event both are calculated at the same time, the one that is the most difficult will pass as the correct block chain. So your transaction may never be processed, because there is always a chance during this stage that your transaction gets lost or unwritten in the block chain.
2. The more transactions that occur with bitcoin block chain, the longer the block chain will be to put together and for transactions to be processed.
   Even if bitcoin could supply enough coins to meet the demand and keep bitcoin's price remain at $1,000 USD per bitcoin, the length of the block chain that needs to be coded would be enormous due to the huge amount of traffic that needs to be recorded with every bitcoin. It is now to a point where it takes six hours for a transaction of bitcoin to completely register. 
3. There is a possibility for someone to write the entire bitcoin block chain and remove or add transactions at will.
   If someone has 51% of the hashing power of a coin (i.e. has enough power to be faster than anyone else to code the entire cryptocoin's bock chain), they can write their own version of the bitcoin block chain. This will immediately make a certain coin worthless, bit it only needs to happen once for someone to rob people out of a transaction, then the coin will basically become worthless.
4. Power costs and processing power the current bitcoin block chain may not sustain the current rate of block chain processing.
   There is a possibility that if the bitcoin block chain becomes too big, then there will not be enough energy to process the transactions. However, it is more likely that if there is enough power, it just may take a lot more time to process the block chain. Especially with the limits of processing not just being power, but that to process a block chain, graphics cards such as GTX 1080 are used to mine bitcoins and process block chains. Unless there are improvements to these graphics cards, they will also be a limiting reagent to process bitcoin block chains faster or at the same rate.

Other alt coins bubble

Bitcoin is essentially the market leader of cryptocurrencies. Most cryptocurrencies have not have enough notoriety to develop into their own niche, so essentially if bitcoin increases or decreases, alt coin will do the same. Bitcoin is also primarily used, in regards to alt coins, to buy certain alt coins that are not accessible to buy with fiat currency such as Veretesium, Ripple and NEO. Most of these alt coins have exploded in price since May 2017 as bitcoin, however most are in a bubble.

Most people are buying these alt coins because they believe these alt coins' projects are going to change the world in some way. But what does the success of the project have to do with the coin? Think about these scenarios for a minute., if the coin is not apart of the project?

• What if the coin is not used for the project?
  For example XRP does not have to be used with the ripple system for transactions and cryptocurrencies. You can just used the software and not use the XRP currency at all.
• What if the coin's value is too high to be a currency?
  For example bitcoin. Bitcoin, at its current price, cannot be used as a properly used currency due to the transaction fees going from $0.35 USD on the 1st January 2017 to $52.183 USD on the 23rd December 2017. This means you cannot use bitcoin for any every day transaction. For some projects, especially bitcoin, it can be detrimental to the ability for the coin to be used in the way it either was intended to be, or is needed to be used.
• Who will take up the project?
  A lot of projects sound great, for example Digibyte, FunFare and OmiseGo. However, who will take these projects up? Even if these projects are good, what if a competitor project produces a better product that does not use a coin and does not allow these projects from entering the market?
• Giving nothing in return (eg. dividend)?
  None of these alt coins give anything in return for holding their coin. Some alt coins, such as NEO will give you some GAS depending on how much NEO you hold. However, that is still just giving someone another cryptocurrency. There is no dividend being paid, no rent or interest. The value only increase because someone is willing to pay more than the coin was bought for.

Conclusion
In this writer's opinion, cryptocurrencies are in a bubble. Bitcoin is not being used for its intended purpose, and is now being held by investors who are only hoping bitcoin increases in value due to a seller willing to buy it at a higher price. In this writer's opinion, the block chain may have practical use in some form in the real world applications, such as contracts. However, it does not seem it can be practical in the form of a currency. 

References

http://www.newsbtc.com/2017/05/02/japan-legalises-bitcoin-price-through-the-roof/, accessed 24 December 2017.

https://people.hofstra.edu/geotrans/eng/ch7en/conc7en/stages_in_a_bubble.html, accessed 24 December 2017.

https://bitinfocharts.com/comparison/bitcoin-transactionfees.html
, accessed 24 December 2017.

http://cryptocurry.com/news/everything-cryptocurrency-bubbles-know/, access 24 December 2017.