Why Bitcoin is not a bubble.

Bitcoin value surged above $3000 USD. But we all say it's a bubble. Strange right? But why are we calling it a bubble. Is there any reason? Isn't really in a bubble?

Hyman Minsky's Seven Bubble Stages.
Late Hyman Minsky, Ph.D., was a famous economist who taught for Washington University’s Economics department for more than 25 years prior to his death in 1996. He studied recurring instability of markets and developed the idea that there are seven stages in any economic bubble:

Stage One – Disturbance:
Every financial bubble begins with a disturbance. It could be the invention of a new technology, such as the Internet (Bitcoin). It may be a shift in laws or economic policy. The creation of ERISA or unexpected reductions of interest rates are examples. No matter what the cause, the outlook changes for one sector of the economy.

Stage Two – Expansion/Prices Start to Increase:
Following the disturbance, prices in that sector start to rise. Initially, the increase is barely noticed. Usually, these higher prices reflect some underlying improvement in fundamentals. As the price increases gain momentum, more people start to notice.
THIS IS WHERE BITCOIN IS NOW

Stage Three – Euphoria/Easy Credit:
Increasing prices do not, by themselves, create a bubble. Every financial bubble needs fuel; cheap and easy credit is, in most cases, that fuel (central banks creating it still like mad). Without it, there can’t be speculation. Without it, the consequences of the disturbance die down and the sector returns to a normal state within the bounds of “historical” ratios or measurements. When a bubble starts, that sector is inundated by outsiders; people who normally would not be there (not yet with Bitcoin). Without cheap and easy credit, the outsiders can’t participate.

Stage Four – Over-trading/Prices Reach a Peak:
As the effects of cheap and easy credit digs deeper, the market begins to accelerate. Overtrading lifts up volumes and spot shortages emerge. Prices start to zoom, and easy profits are made. This brings in more outsiders, and prices run out of control. This is the point that amateurs, the foolish, the greedy, and the desperate enter the market. Just as a fire is fed by more fuel, a financial bubble needs cheap and easy credit and more outsiders.
(stage 4 is still in the distant future for Bitcoin)

Stage Five – Market Reversal/Insider Profit Taking:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”

Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end.

Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.
(When this happens to stocks, Bitcoin and other cryptos to benefit).

Why Bitcoin is not in a bubble yet:

1. Decentralization
   The power of Bitcoin rests in its decentralized nature. Because Bitcoin is not owned by any centralized banking system (unlike national currencies), the value cannot be arbitrarily manipulated by currency production (i.e. the devaluation of the German Mark, post-WWII). This gives Bitcoin the stability of a commodity like gold.

2. Supply
   The supply of Bitcoin, unlike all other items of value like gold or currency, is strictly limited. There will never be more than 21 mln Bitcoins ever mined. The market is at 80 percent of that number, and will never exceed it. Mining is only getting harder, and the value of each coin will continue to increase.

3. Security
   Decentralization and encryption mean that Bitcoin is secure. It cannot be manipulated by external forces and cannot be confiscated, apart from the hard copy key, which is held only by the individual user entity.

4. Fraud-proof
   Because all Bitcoin transactions are recorded in the Blockchain, the opportunity for fraud is minuscule at best, and immediately traceable.

With unsurpassed security, zero external manipulation and a limited supply, there is no reason why Bitcoin should not continue to increase in price for the foreseeable future. Bubble concerns are based on markets where these factors are not in effect.

While a bubble is certainly a possibility in the distant future, the valuation point for Bitcoin is only being tested by the recent gains.

Source:http://economicedge.blogspot.in/2017/06/the-math-of-bitcoin-and-why-it-is-not.html?m=1