Why Bitcoin IS a Bubble, and How It Will Eventually Burst!
Hey guys, so I've been thinking about why the price of Bitcoin continues to rise even though the technology is really not very good even compared to your regular debit cards/ credit cards and bank. The transaction fees are absurd for small payments, takes an hour plus to send bitcoin (as opposed to instantly depositing fiat through a debit card on coinbase for example), if you know someone's public block chain address you can find their balance and incoming and outgoing transactions and which address these are going to/ came from (can't go into a bank and ask for these financial details of someone as an average person), etc.
This post is my attempt at explaining why Bitcoin's price increase is artificial in a way and not based on Bitcoin's underlying value as a technology. Also, I explain why price one day in the not too distance future will collapse. I'm going to use an imaginary character called John for this example and imaginary prices as well. So, let's get straight into it.
John wants 1 BTC so he goes on Coinbase deposits $10,000 fiat and buys 1 BTC for this $10,000.
John now has the 1 BTC and has $10,000 less than he had. Coinbase now has $10,000 but 1 BTC less than they had. Let's suppose that Coinbase had 10,000 BTC and now they have 9,999 BTC. The point is they have less BTC than they had.
When John bought this 1 BTC he pushed the price up to $10,001. John now sends his 1 BTC to Binance and sells it for 10,000 XRP. Binance now has 1 more BTC and John has 10,000 more XRP. John has pushed the price of XRP up from 10,000 per bitcoin to 10,001 XRP per bitcoin. But has the price of BTC went down in USD terms because he sold his Bitcoin for XRP?
The obvious answer is no, because no USD was involved in that trade. So, what happens if Binance does not sell their BTC for USD, on an exchange where BTC/USD is an available trading pair, and keeps the BTC? Obviously the price of BTC in terms of USD will not go back down and so it will stay at it's increased price.
Now we all understand that this example is happening time and time again on a massive scale, and so Binance will be selling some of their Bitcoins for various financial reasons. The point is that if Binance keeps more Bitcoins than they sell for USD then the price of Bitcoin will keeping going up, not because Bitcoin is a fantastic technology, but because a lot of people have to buy Bitcoin before they can get their hands on altcoins from USD.
(I also understand that some people buy Litecoin, Ethereum, Bitcoin Cash instead of Bitcoin to get their altcoins, and they are smart, but I would say a lot more people buy Bitcoin just because they are new, Bitcoin is the biggest coin, and don't realize the cons of doing this.)
So why will the Bitcoin Bubble eventually burst? Well, as it becomes easier, and not so expensive in terms of fees, to buy altcoins straight from fiat, more people will do this. The artificial increasing of Bitcoin's price as I illustrated in the example, will happen increasingly less as people become aware of this easier way to get the cryptos they want. Then the Bitcoin Bubble will burst and people who have Bitcoin who are unaware of these, in my opinion inevitable, series of events will suffer greatly.
Some of you may be concerned abut Bitcoin falling because in the current structure alts fall with Bitcoin, but as I have illustrated, Alts only currently fall with Bitcoin simply because of the fact that the falling is due to investors not buying Bitcoin to then buy alts. When people can buy alts straight with fiat, I have no doubt in my mind that Bitcoin's price demise will be met simultaneously with a massive price increase for most other cryptocurrencies.
So, anyway guys that's it for this post, let me know in the comments section below what you think about this, and whether you think it makes sense or not.
Thank you for reading and as always, up-vote and follow me and I will follow you back!
Legal Disclaimer: This is just my analysis and not to be taken as professional financial advice. Do your own research beyond what you read in my blog posts and make your own decisions based on your beliefs about what to invest your money in.
@investingtips, I think your article is only fundamentally correct to a certain point.
Binance does not own and therefore does not sell their Bitcoin. Market participants (us!) do and Binance is there to facilitate a sale (match a buyer with a seller) and take a little fee for the privilege.
Therefore when sales happen, Binance does not start running out of coins to sell and price should therefore be unchanged (unless of course more bitcoin are released to the market and we would observe something that we would call inflation).
All this means is that 1 Bitcoin is no longer owned by John, but it is owned by "Peter". And the cash that Peter received as a result of the sale is no longer in Johns pocket. Two currencies changed hands, but they have not disappeared from the market. Same applies to the subsequent transaction of XRP.
There are a whole lot of levels of complexity we could dive into here including discussing what actually drives the price to go up or down, but I will leave that for another day!
Good luck,
A.
I have to disagree man, if you owned your cryptos on Binance they would give you the private key to the wallet they are stored in... they own the private key to the wallet not you. You have given ownership to them when you deposit into one of their wallets. I believe not many people at all think about this though... You are trusting them to give you your crypto back upon request. Which obviously isn't a massive deal since Binance is massive and wouldn't be in their interest to steal people's crypto.
Also, I didn't mean the crypto has disappeared, but just that if it isn't being sold/bought on an exchange then it isn't affecting current price anymore. I'm sure you would agree if I bought 100 Bitcoins, putting the price up, then didn't sell them off and just kept them in a wallet, price wouldn't go down again as a result of them particular Bitcoins, that is all I meant.
I appreciate your response @investingtips and there is nothing wrong with disagreeing!
I don't think that I (or you) have any reasonable proof what Binance do with cryptocurrencies stored in their wallets although I would not be surprised if the currencies locked in their wallets are then used for Binance to make money. Similarly to how banks use our deposits/money in savings accounts etc. If you do have proof, however, I'd be very interested to have a look at it.
To respond to your second part of the comment, I do not agree that if you bought 100 BTC from me the price would go up. The reason why it would not is because your 100 "units" of demand have been fulfilled by my 100 "units" of supply. I do not need those 100BTC anymore and you don't want to sell them anymore because you sold already at a market price of $10000/BTC. The next available offer to sell BTC could be $10001 or $10010 or something else depending on liquidity, etc. however the next available request to buy BTC could be $9999 or something even lower. It depends on what other market participants decide to do which will determine the "new" market price and not the fact that some Bitcoin has exchanged hands!
Ah, I think I see what you are saying now. If I buy 100 BTC at $10,000 and you are willing to sell 100 BTC at $10,000 then price wouldn't change because it is a straight swap. But if I was wanting to buy 100 BTC at $10,000 and people we're only willing to sell 25BTC at $10,000, 25 BTC at $10,001 and the last 50 BTC at $10,002 then price would go up to $10,002 in that case?
So, basically every time BTC is bought doesn't mean it will go up, is that what you mean?
@investingtips I think you got it. There is one technicality though which I just want to mention for completeness. If you place an order to buy 100 units for $10000, then in practice your order will only be filled partially (25BTC) until someone else comes along and sells you some more for $10000.
It's a pleasure having another discussion with you!
Ah, I get it now! I'm glad we had this discussion and thank you for explaining that to me.
Mhhm, now if I sell my steem dollar for steem does that make the price of steem dollar to go down?
Depends what it is in relation to, the price of Steem Dollars in USD wouldn't go down of course, so if Steem Dollars was at $5.00 you wouldn't affect that because USD isn't involved.
If you sold Steem Dollars for Steem then it would just change the ratio of how many Steem Dollars people can get for each Steem, in the case of selling Steem Dollars, people would be able to get more Steem Dollars for each 1 unit of Steem.
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