Usually when we hear a person say that a gigantic bubble has formed around Bitcoin (BTC) we consider it as a negative aspect for crypto, but is there a possibility that this is not the case?
Is Bitcoin a bubble?
As many will know, since mid-2020, Bitcoin has been on a bullish path. This is how it surpassed its previous historical maximum and positioned a new one well above the previous one.
Yes, at the beginning of October 2020 BTC was trading at approximately USD 10,000 and, just about three months later, the crypto was trading close to USD 40,000.
These types of movements are not strange for Bitcoin, however, if they are within traditional financial markets. Consequently, fundamentals are starting to feed pointing to a possible bubble around Bitcoin that, as is well known, could burst at any moment.
It is precisely at the time when the bubble bursts that the term has been given a negative connotation, however, what if I tell you that, in reality, a bubble does not always have to be something negative?
A bubble can bring benefits
Investors generally give a negative connotation to the term “bubble”, implying the popular delusions and madness of the crowds after the explosion.
However, as Fortune argues, financial bubbles in some cases are generated by a temporary excess optimism about real innovation, which can offer benefits to the asset in the future. In fact, Fortune gives as an example what happened after the dot-com bubble.
Likewise, Yanhao Max Wei, a CoinDesk contributor, explained that, contrary to what many think, volatility can ultimately be positive for Bitcoin because it promotes its mass adoption.
Arousing interest in investors
How? Well, Max Wei raises a positive perspective of a Bitcoin bubble, where the bubble results in free and massive publicity for the crypto.
Without a doubt, Max Wei’s approach is quite in line with reality. As we have witnessed, the rise in BTC prices during 2020 prompted the media to start talking once again about the cryptocurrency and its bold move.
But, if you still don’t believe it, research was conducted by Max Wei by Anthony Dukes, both professors at USC Marshall, who, according to CoinDesk, found that price bubbles and user adoption can be mutually reinforcing in the crypto market.
Therefore, a bubble ironically favors the adoption of Bitcoin and, with it, long-term benefits even for the entire crypto market.
“It becomes a reinforcing loop where price bubbles accelerate the growth of the Bitcoin user base … whose expectation fuels the price bubble”wrote Yanhao Max Wei for CoinDesk.
Max Wei compared the effect of a bubble in Bitcoin with what happens “When a brand introduces limited-edition shoes, and the hype surrounding the ‘fall’ draws attention in itself.”