When Will the Bitcoin Bubble Burst?

Bitcoin went past the US$14,000-mark yesterday, and its market capitalisation has surpassed some of the largest and most-established businesses in Singapore.

Even before this, many had called Bitcoin a bubble. Warren Buffett once said that Bitcoin is “not a value-producing asset… it’s a real bubble in that sort of thing”.

The latest to call Bitcoin a bubble was Stephen Roach, a widely-regarded economist who is now Yale University’s senior fellow. In a recent interview with CNBC, he mentioned:

“Given the lack of intrinsic, underlying economic value to the concept… This is a dangerous speculative bubble by any shadow or stretch of the imagination.”

He said further:

“I’ve never seen a chart of a security where the price really has a vertical pattern to it. And bitcoin is the most vertical of any pattern I’ve ever seen in my career.”

When Roach commented about the “vertical pattern” of the Bitcoin price chart, I could not help but draw parallels to the price of silver in early 2011 before it fell off a cliff. The metal had an explosive price behaviour in its heyday too.

Silver was said to be a safe haven amid all the currency printing by the US Federal Reserve after the sub-prime crisis from 2007 to 2009.

At the end of 2006, silver was selling for around US$13 per ounce. By March 2011, silver reached US$46.47 per ounce. However, the metal is back to December 2007 levels. It was selling for US$15.98 per ounce as of yesterday morning.

Source: BullionVault

In comparison, the following is the Bitcoin price chart as presented in my previous article.

Source: Coindesk (chart as of yesterday morning)

We can see an uncannily similar price pattern in both silver (just before its peak) and Bitcoin. So, the million-dollar question is: When will the Bitcoin bubble burst?

I don’t like to burst your bubble, but no one will ever know for sure when a bubble will burst until it happens. For now, though, it pays to stay on the sidelines and not to get sucked into the euphoria.

Let me end off with a lengthy-but-worthy quote by Buffett, which applies to all types of investments (emphases mine):

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice.

But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

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Editor's note: The article was updated for clarity after publishing. 

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.