According to Panos Mourdoukoutas, Professor and Chair of the Department of Economics at LIU Post in New York who is also contributing to several professional journals and magazines, such as Forbes and The New York Times, when the bitcoin bubble will burst, there will be a final stage, which he calls “mania”.
The professor explained that every bubble has the same attributes, which is often confused with healthy bull markets. The pattern starts with investor hype over a popular topic. This theme can be an exotic product or an emerging industry, which promises a major change to the world while making the investors rich during the process, Mourdoukoutas wrote.
Comparing the 12-month performance of Bitcoin Investment Trust Shares (GBTC) and SPDR Gold Shares (GLD), we will see a major difference. While GLD increased its value by 3.93 percent in one year, bitcoin surged by 390 percent in the same period of time.
According to the professor, accommodative central banks often finance the bubbles to grow bigger. In addition, market experts can also help prices double or triple by posting their predictions on social media creating buzz for the bubble. This phase of the bubble is called mania. Mourdoukoutas explained that, at this point, the theme reaches a cascade where no investor wants to be left behind.
The burst of the bubble can be expected when the early investors have already cashed out, and there are no new investors joining the club, the professor said.
Mourdoukoutas stated that the current run up of bitcoin and other cryptocurrencies has mostly the same as a bubble. He described BTC as an exotic asset, which has great and unique advantages. One of the most important is the attribute of bitcoin, which makes it a better hedge against global uncertainties than conventional hedges, such as gold. In addition, the cryptocurrency is a convenient form of payment, which can be used globally, however, has a limited supply of 21 million, the professor explained.
According to the economics professor, there is investor hype surrounding bitcoin. Many investors had become familiar with the cryptocurrency, who can use investment trusts, such as GBTC, to participate in the market holding a good position. In addition, there is an “ultra-low interest rate environment” associated with bitcoin, the professor states.
However, Mourdoukoutas explained that only one thing is missing from bitcoin’s transformation from bubble to mania: “a broad participation beyond the ‘pioneers’ and the ‘early adopters,’ to ‘early majority'”. That’s the point where the demand for bitcoin “reaches a cascade” and the mania starts. At this phase, according to the professor, the key majority of the investors rush to invest in the cryptocurrency for the “promise it holds, rather than the fundamentals it displays.”
If investment promises are not met with the end of bubbles and manias, money will be lost faster than it was made, according to Mourdoukoutas.
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Last modified: May 21, 2020 9:44 AM UTC