A virtual buble?
The assets traded in free markets undergo constant fluctuation of prices that are determined by several factors depending on the characteristics of the market they are being trade in. Nevertheless, we can still make a good evaluation of these tendencies if we can separate these factors in two groups: supply and demand.
For instance, consider the case of agricultural commodities: climate changes, new technology use and falling input prices can affect the quantity of the product offered; and, government interference with tax changes and income growth directly affect the demand. Basically, what changes between markets is the type of factor we are evaluating.
In the world economy, we have already had several examples of asset’s price increases in a short period of time that didn’t end up well: The Japanese Asset Price Bubble (1990), The Dot-com Crash (2002) and, more recently, The 2008 Financial Crises. In many of these cases we end up classifying events as a bubble by the fact that the prices have risen in such a way that they have distorted any ability to relate to other economic references and be supported by demand factors. But, care to see, that in those events, the low interest scenario and its impacts on currency issue or limitation were always present. Rather saying, there was always the “finger” of the Government driving those bubbles.
Currently, the talk of the moment is Bitcoin and its fast increase in price. Could it be classified as a bubble? Rather than answering this question, I’ll bring determining issues that differentiate this asset from the others (residence prices, Apple shares, soy bean prices and Russia’s index). Bitcoin is not a physical asset and doesn’t present a quarterly balance sheet that shows profit or loss to guide price reference. On the other hand, there’s no Government or bank interference on this digital currency. Also, the Bitcoin was design to have a limited issue of currency: ฿ 12.5 for each block. As we have one block, on average, every 8-10 minutes, then we have a total issue of ฿ 657,00 to ฿ 821,00 per year. Can anyone tell how many dollars will be issued by the USA Central Bank next year? Or, how many government bonds will be trade by the central banks of the USA, or Europe, or Japan, or Brazil on this same period? No, the numbers are uncertain. This uncertainty adds risks to this countries’ currencies, inflates the asset market, distort prices and indeed contributes to the formation of bubbles. However, in the case of Bitcoin, there’s no possibility of changing the supply. There’s no Central Bank of Bitcoin issuing currency. Thus, what will determine the behavior of its price will be the demand on it and the propensity to spare it once bought. The more people want to buy the currency, the more its price will rise. The more its accepted in commercial establishments and the more ATMs we have, the more its price will rise. The more people who buy the coin decide to save it and not negotiate it, the more they will be contributing for further supply reduce and therefore, the faster the price goes up.
Of course, the reverse effect may occur and its part of the natural behavior of asset markets with supply and demand like stocks, commodities and exchanges. Yet, the extent of this impact will depend on how much people would be wanting to get rid of this asset in the near future. Even so, this hypothesis seems very unlikely to happen based on the recent events.
Just one last consideration: Bitcoin wasn’t created to represent an investment opportunity, but rather to facilitate transactions between peers. Keep that in mind.
