As the bitcoin rally continues, are we witnessing a bubble?

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Dr Garrick Hileman, research fellow at the Cambridge Centre for Alternative Finance, Judge Business School, says Yes.

It’s unclear whether the recent ransomware attacks and stories of preemptive bitcoin stockpiling have had a significant impact on its price, which has more than tripled over the past twelve months. Regardless, is it true we are witnessing another bitcoin bubble?

Many other cryptocurrencies (often called “altcoins”) have seen an even larger price increase than bitcoin. Ethereum, which has been attracting interest from banks (as well as ransomware extortionists), has increased in value by 1,400 per cent in under a year.

Indeed, the value of the entire cryptocurrency universe, now estimated at over £40bn, has doubled in just the past month alone. While solid economic rationale – in the form of innovation and growing cryptocurrency use – underpins part of this increase in value, it is also very likely that some cryptocurrencies are currently overvalued.

Paradoxically, should a cryptocurrency bubble burst, the price of bitcoin may rise even further, at least in the short-run, as bitcoin is the dominant currency pair for altcoin exchange trades.

Colin Hanna, an associate at Balderton Capital, says No.

No, I do not believe we are in a bitcoin bubble. Bitcoin and other cryptocurrencies will continue to be very volatile assets, but for long-term investors there are handsome future returns.

Why? You can think of these currencies as networks. Like all networks, they increase in value exponentially as more people participate. Moreover, in a time of geopolitical flux, many investors are looking to these assets as alternatives to the classic macro asset classes of currencies, commodities, equities, government bonds, and fixed income investments.

While bitcoin’s market cap is still below $30bn, the total aggregate market cap of all cryptocurrencies likely does exceed $50bn, particularly given the recent strength of Ethereum – which is now approaching $10bn.

In summary, while we may see increased price volatility in the near term, bitcoin and other networks like Ethereum are going to continue to gain value in the long run. Both as fundamentally new distributed technologies, and alternative asset classes.

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