Bitcoin’s price set a new record on Saturday as the virtual currency rose above $19,000 for the first time on the Bitstamp exchange. The gains came just hours after the currency crossed the $18,000 mark. Bitcoin’s value has doubled over the last three weeks, and it’s up more than 20-fold over the last year.
Bitcoin’s value keeps rising despite a growing chorus of experts who say the currency value is an unsustainable bubble. One CNBC survey this week found that 80 percent of Wall Street economists and market strategists saw bitcoin’s rise as a bubble, compared to just two percent who said the currency’s value was justified. Another survey reported by The Wall Street Journal this week found that 51 out of 53 economists surveyed thought bitcoin’s price was an unsustainable bubble.
We recently asked two experts on the history of bubbles about bitcoin, and both saw echoes of earlier bubbles in the current bitcoin boom.
“A lot of bubbles historically involve some kind of new financial technology the effects of which people can’t really predict,” said William Deringer, an historian at MIT. “These new financial innovations create enthusiasm at a speed that is greater than people are able to reckon with all the consequences.”
Of course many bitcoin traders are unlikely to take these warnings seriously because mainstream experts have described bitcoin as overvalued for years—only to see the currency rise to even greater heights.
And by the standards of the global financial system, bitcoin is still a relatively small fish. All bitcoins in circulation are now worth around $300 billion. That’s about a fifth of the roughly $1.5 trillion in gold held for private investment (when you factor in gold used for all purposes—government reserves, jewelry, and industrial uses—it’s more like $7 trillion).
On the other hand, the bitcoin network itself is also quite small. The network has been averaging about four transactions per second in recent weeks, and that pace of transactions has strained the network’s capacity. In the last week, the network’s average transaction fees have soared to more than $20 per transaction as demand for the network outstripped supply.
Bitcoin developers have ideas for relieving these bottlenecks—most notably, a new payment network called Lightning that operates as a layer on top of the bitcoin blockchain. If it works as advertised, it could dramatically expand the bitcoin network’s throughput, but the technology is still in the early stages of development.
The bottom line is that there’s huge uncertainty about bitcoin’s longterm value. The price could go up even more, but it could also drop dramatically in the coming months. In previous bitcoin crashes, the price has plunged by as much as 80 percent in a matter of days. So please don’t invest money you can’t afford to lose.