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The role of money – Why debates about a bubble are often irrational

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These days, many self-proclaimed experts are taking the floor when it comes to cryptocurrencies. Often in this context, even the word bubble can be heard. It saves neither criticism nor comparisons, either with the tulip mania in the 17th century or the New Economy in the late 90s. We'll take a closer look at the argument and put it in order.

At the same time, predictions for bitcoin at astronomical heights and vast depths are appearing in lockstep. Most media prophesy a terrific crash. A return of 18,000% is hardly comprehensible for many. A new, unique product that has not existed yet. Where does this end? An early end is inevitable. Many people think about Bitcoin these days, not about technology companies like Apple. The 18,000% return did not only bring Bitcoin, but also Apple over the last 14 years. The perception in the media is currently quite distorted.

So it is time to look at the development of cryptocurrencies in a neutral way. Professional investors like to protect their portfolio with gold. The same investors today complain about the trustworthiness and meaningfulness of Bitcoin. They both have one thing in common: they are only valuable because the majority sees it the same way. Of course Bitcoins become worthless if nobody shows interest in the cryptocurrency anymore. The same is true for gold: If the perception of gold changes, the price would crash. The industrial use of gold does not justify the high market price. Who holds a troy ounce of gold in his hands, benefits from the pure possession only very limited. Nevertheless, the raw material has long been valued as a "safe haven". Bitcoin, however, is increasingly accepted as a means of payment. To say that Bitcoin is independent of politics would be wrong. This is particularly evident in the news from China and Korea in recent weeks. Many governments are supplanting digital currency or banning concrete prohibition.

Benefits of a Non-State Currency

However, cryptocurrencies stand for freedom unlike traditional fiat currencies. Officially, central banks and politics are separate in democratic countries, yet the influence is unmistakable. However, no state has direct access to the properties of cryptocurrencies. This is a big plus in times of growing political instability and restrictions on liberties. Just how much a state guarantee is worth is shown by the example of Venezuela. The Bolivar is almost worthless, inflation has risen dramatically. Comparable terrible inflation experienced numerous countries in the past century, sometimes several times. Under no circumstances is a government currency a guarantee of security.

At the same time, Bitcoin's money supply is still low from an international perspective. We currently have a market capitalization of $ 200 billion or $ 0.2 trillion at Bitcoin. This is very small compared to the money supply of the two most important economies in the world, the US and the EU. Even all cryptocurrencies in circulation are around $ 0.5 trillion. The smallest amount of money, M1, comprising cash and sight deposits, is currently around $ 10 trillion in the euro area and $ 3.6 trillion in the US. A comparison with the money stock M1 is inadequate, as it primarily captures cash. M2 also includes short-term savings products. A more appropriate measure, as many Bitcoin and other currencies have become investment instruments. The money stock M2 for the two economic areas is 13 trillion (US) and 14 trillion US dollars (Europe).

For completeness, M3 is also mentioned. It is relatively close to M2, but also includes longer-running savings products. However, the amount for M3 is no longer published regularly.

So far, we are only talking about two, albeit large economic areas. The entire Asian region is not even there. And that's where digital currencies meet with much enthusiasm. So the global money supply is a multiple of the market capitalization of all crypto currencies. In other words, there is still room for growth.

Also, the bitcoin (or other crypt currency) is not yet a competitor to the current currency trading volume – the daily trading of fiat currency, also called FX trading. This number is about $ 6 trillion daily! Bitcoins are traded daily for around $ 1.5 billion. That's still a lot, but not unimaginable.

A bubble, already a contender for the title "Unwot of the Year," still seems inevitable to many – as Goldman Sachs reported yesterday. This is much easier said than proven. Ultimately, the word bubble is hyped by the media, but not understood. Even for scientists, bubbles remain very difficult to grasp and at best clearly visible in retrospect. American researcher Jean-Paul Rodrigue developed a theory to describe bubble formation. The magazine Forbes already applied the model to Bitcoin in the winter of 2013 and describes the strong parallels. Since then, the price has increased more than twentyfold. Now the Financial Times argues that blistering is based on the same model.

Let's get back to Apple and Co. The technology companies experienced the bursting of a gigantic bubble at the turn of the millennium. And today? Are they stronger than ever back on the market?


About Tim Stockschlaeger

 Tim Stockschlaeger Tim Stockschlaeger studied economics with a focus on finance in Augsburg and Leipzig. In the Bachelor's he wrote articles for various magazines and daily newspapers. After graduating, he first worked for Deutsche Bank and is now a freelance author and consultant. In focus: The rapid change in the financial industry.

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