Is the Bitcoin bubble about to burst?

As crypto-currency Bitcoin continues to rise in value, is a bubble forming?Are we on the cusp of a Bitcoin bubble?

What goes up must come down – or must it? Bitcoin’s recent stratospheric rise has helped push the value of crypto-currencies through the $50 billion-mark, triggering concerns over the creation of an unstable asset bubble in what is a largely unregulated market.

The rapid growth in alternative digital currencies — so-called ‘alt-coins’ — as well as in Bitcoin itself is without precedent; the value of Bitcoin alone has risen by more than 50% in a month and is currently worth more than gold. It’s an astonishing trajectory for a virtual, non-fiat currency.

Fuelled by online exchange

The rally has its roots in the growing acceptance of Bitcoin as a means of online exchange. Bitcoin is powered by a blockchain and stored in a digital wallet, which can be saved locally on a hard drive or phone or online with a Bitcoin exchange. Websites that accept Bitcoin are vanishingly rare and spending it in the real world is nigh on impossible, although Japan does recognise Bitcoin as a legal method of payment, after it forced Bitcoin exchanges to register with the state and comply with anti-money-laundering regulations.

The blockchain model is, in itself, a robust system – resistant to tampering and capable of being managed in a distributed manner. Countries with problematic currencies, as well as charities such as the Bill and Melinda Gates foundation are investigating the used of blockchain technology in places where people have inadequate access to banking options.

The dark side of crypto-currencies

It’s Bitcoin’s anonymity that has seen the currency’s rise in status – something that has seen it become the payment method of choice for cyber criminals, including those involved in international attacks such as the ‘WannaCry’ ransomware hack that recently caught large institutions all over the world on the hop.

Ransomware attacks are occurring with increased frequency as the value of Bitcoin soars. It’s an easy win for criminals who can demand Bitcoin payments in return for decryption, without exposing themselves to capture. A few moves along the blockchain and even the dirtiest money is as clean as a whistle.

Bitcoin is operating in the financial hinterland. The WannaCry assets are only the tip of a very large iceberg, with allegations of involvement by terrorist groups and organised crime, not to mention hostile foreign governments. Not that Bitcoin exchanges themselves are immune to fraud. Bitcoins are often stolen from users – and there’s no chance of applying to any official body for a refund.

Trading remains volatile

Despite everything, Bitcoin is growing in popularity and in value because more people are using it. It’s estimated that as many as six million people around the world have a Bitcoin wallet and there are rumours that big banks are even stockpiling bitcoin as ransom reserves. It’s still too early and too complex for adoption as a fiat currency, though. The fluctuations in value (which have dipped dramatically over the years as well as risen) make it far too unstable to use as a sole asset source.

Fears are also growing that the unprecedented increase in value could be the result of manipulation by traders looking to move prices to their advantage. There’s plenty of bullishness in the market and speculation that Bitcoin values could top $6,000 this year. But if bitcoin and other crypto-currencies fail to gain traction in the wider trading space, it could signal the end of the party.

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