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This is a user generated content for MyStory, a YourStory initiative to enable its community to contribute and have their voices heard. The views and writings here reflect that of the author and not of YourStory.
Three highly respected international academics have warned potential investors that the bitcoin bubble is guaranteed to burst.
In a recent article in TheConversation.com, both Larisa Yarovava from Anglia Ruskin University and Brian Lucey from Trinity College in Dublin, both went into detail discussing the forthcoming fall of the currency.
Their article came in the light of Bitcoin increasing from under $800 in value to $16,000 in the past twelve months. Naturally, many investors have been wondering whether this drastic increase will continue into the future.
There have been several voices from the economic community stating that there is literally no chance of this value being maintained and further increases are just blowing up a bubble which is guaranteed to burst.
Although, Yarovava and Lucey start their analysis with the observation that Bitcoin does have some fundamental value. However, both academics do go on to discuss at length how this value is nowhere near its current market value and state that Bitcoin is currently experiencing a bubble.
The pair, along with Shaen Corbet of Dublin City University, undertook research which looked at the initial elements of the cryptocurrency and how it is priced.
As any cryptocurrency investor knows, Bitcoin is created by mining, usually done by using supercomputers that solve incredibly complex mathematical problems. It is built on a technology which allows it to be free from any banking system and anonymous. There a limited number of Bitcoins available - thought to be 21 million. There are currently about 17 million in circulation.
The mathematical problems involved come from blockchain technology, where instead of banks verifying transactions, miners do. The first thing the researchers looked at was the difficulty of mining and whether this equates to the price which is currently being heralded.
They investigated the "hash rate." In layman terms, this equates to the speed a mining computer can operate on; the faster, the more likely the computer owner will get paid.
The third is block size - this block chain technology requires miners to solve entire chains to get paid, so the smaller chains are usually more easily solved.
The final thing they researched was the volume of transactions. With currency, the more it is used, the more valuable. That's economics 101.
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Considering its current value, one of the most shocking thing that was discussed was the currency's early days; it only reached the price of $1 on April of 2011. It then increased to $100 during April, 2013. Since then, the rise has been nothing short of astronomical.
This expansive growth rate, led to the study looking at the point where the currency 'explodes', meaning that they looked at the point in the series where there was an explosive growth point in value that was not underpinned by the elements of the currency - the hash rate, the block chain size and the volume of transactions.
"Old school economists are trying to compare Bitcoin with commodities like Gold, they are not taking into consideration the Blockchain technology which has a massive factor on the price and will probably change the world we live in very soon," said Andrew Sung of CoinSpectator.
Their analysis showed points in late 2013 and early 2014 where a price bubble was created. This bubble went onto burst.
This analysis showed clear and visible points where there were bubbles, including right now, where Bitcoin is demonstrating clear signs of explosive behaviour, as the price is increasing in a way that is not related to its technical elements.
Although they were able to point out that there is a bubble, the researchers could not indicate when it would burst.
As they wrote: "What is not yet available is an accurate advanced warning bubble indicator. In its absence, this approach may be the best. Unfortunately, we cannot use this approach to determine the extent of the bubble. There is no well-accepted model that suggests a “fair” value for Bitcoin. But whatever that level is, it is almost certain that, at present, it is well below where we are now."