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Financial Observer Claims Bitcoin is a Bubble Threatening the Larger Economy

Last Updated March 4, 2021 4:59 PM
Lester Coleman
Last Updated March 4, 2021 4:59 PM

Matthew Lynn, a Bloomberg columnist, warned in Moneyweek  that bitcoin’s rapid price rise makes it a bubble that could have ramifications for the entire economy.

Lynn said it makes sense that bitcoin’s price should rise as it establishes itself as a mainstream currency. But he takes issue with the amount of the rise: 800% in a year, a quadrupling in just over six months and an 87% gain in a month.

Bitcoin’s Price Not Normal

Lynn said this is not a normal price rise for an asset. A couple hundred years of financial history indicates this type of rise is a bubble. He said the impact will matter to more than the few people who own bitcoin.

For one thing, the bubble will bring overinvestment. Entrepreneurs will lure investors into cryptocurrency startups.

Lynn compared the bitcoin bubble to the dotcom bubble in which a lot of capital was wasted that could have been better deployed elsewhere.

The bubble also indicates manias have returned to the financial markets thanks to the long bull run. In any bull market, there are assets that Lynn said “goes crazy.” The last time this occurred, sub-prime mortgages were the crazy asset.

Prior to sub-prime mortgages, Internet stocks went crazy. Everyone piled in and the prices skyrocketed. In the case of the Internet bubble, asset prices indicated the market had become detached from reality and was going to collapse.

Also read: Last stage of bitcoin bubble yet to occur, says economic professor

Impact On The Economy At Large

Cryptocurrency has not become a huge form of money and has not yet registered in relation to global capital markets, Lynn noted. But it is becoming integrated into the world of finance. And once one part of the monetary system wobbles, the entire edifice becomes weakened, which is what occurred in 2008 and 2009.

Lynn said it is unknown what contracts and derivatives have been linked to cryptocurrencies or how deeply they have integrated into the financial system. This will become evident when a crash occurs. The losses connected to the crash could ripple in unexpected ways.

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