Bitcoin Bubble: Definition and What Investors Need to Know

Bubbles form when an investment's price far exceeds its value. Some wonder whether Bitcoin fits this definition.

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Some investors argue that Bitcoin, in general, is a bubble.

Financial bubbles can be found throughout history — with tulips in the 17th century and internet stocks in the late '90s. They're often seen only in hindsight. Until one pops, it's tricky to distinguish a bubble from businesses that are merely volatile or growing quickly. Bitcoin is undoubtedly volatile: Along with many bull runs, Bitcoin has had multiple steep price drops, such as its dramatic fall from $70,000 in late 2021 to $19,000 in October 2022.

Prominent leaders in finance are split on the long-term viability of Bitcoin as an investment, too. Some have doubts about the underlying value of the cryptocurrency, which doesn't hold assets or generate revenue like a traditional company, while others are bullish on Bitcoin's future.

Who thinks Bitcoin is overvalued?

Warren Buffett. At Berkshire Hathaway's annual shareholder meeting in 2022, Buffett, the company's longtime CEO and one of the wealthiest people in the world, said he wouldn't buy all the Bitcoin in the world for $25. "What would I do with it?" he asked. "I have to sell it back to you one way or another."

At the heart of his critique is the fact that Bitcoin doesn't generate income for its owners — unlike, say, a company that sells products or services. Although it's possible for something to be valuable without producing value in a traditional sense, such as paintings, he said those situations are rare and don't apply to Bitcoin. Instead of generating value, he said the cryptocurrency "depends on the next guy paying you more."

Jamie Dimon. The JPMorgan Chase CEO told Congress in September 2022 that he was a "major skeptic" of cryptocurrency, including Bitcoin — a viewpoint he has held for years. "They are decentralized Ponzi schemes," he said. "The notion that they are good for anybody is unbelievable."

His doubts about cryptocurrency, he said, didn't extend to stablecoins: "There would be nothing wrong with a stablecoin, properly regulated."

Who thinks Bitcoin has a bright future?

Jack Dorsey. As the founder of Twitter and the CEO of Block — the parent company of Cash App and Square, with a name that is a play on blockchain — Dorsey has a lengthy track record in tech and finance. "I don't think there's anything more important in my lifetime to work on" than Bitcoin, he said at a 2021 Bitcoin conference. Bitcoin, especially, stands out against all other cryptocurrencies, he said: "All the other coins, to me, don't factor in at all."

Marc Andreessen. The tech entrepreneur who invented the first modern internet browser, and later backed companies like Airbnb, Facebook and Slack as a billionaire venture capitalist, has been bullish on Bitcoin for years. His investment firm, Andreessen Horowitz, invests in dozens of crypto-related projects, including Coinbase.

In his 2014 New York Times op-ed "Why Bitcoin Matters," Andreessen wrote: "Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era."

Is there a Bitcoin bubble?

It's hard to say — partly because it's tricky to determine Bitcoin's real value. Two factors make valuing Bitcoin particularly difficult.

  • Bitcoin has a short track record. New companies can be volatile, so prices are prone to quick and dramatic change as the market determines its fair price. These sudden price U-turns can give the appearance of bubbles forming and popping.

  • Bitcoin is fundamentally different. Investors have methods to assess the value of a company, even new ones. But those approaches don't work with cryptocurrencies. Bitcoin is not a company and does not generate revenue — an important factor in determining a company's value.

For most of 2022, prices have languished during the crypto winter. However, experts disagree on whether this is a temporary setback or the beginning of the end. At the same time, regulators are increasing scrutiny on crypto, which could indicate that it is becoming more integrated into the nation's financial system. In addition, some traditional finance companies, including Fidelity, Visa and Mastercard, are working to bring Bitcoin into the mainstream.

If you want to invest in crypto but are concerned about the potential downside, limiting your exposure is a good idea. As a rule of thumb, invest no more than 10% of your total holdings in risky assets like crypto. This way, you can take advantage of the best-case scenarios while mitigating losses if prices plummet.

Neither the author nor editor held positions in the aforementioned investments at the time of publication.

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