As the value of Bitcoin has surged over the past 12 months, one question has overshadowed the rise in the value of the crypto currency: is this a bubble?
While it’s usually only possible to answer this question when it’s too late (one of the critical characteristics of bubbles is that they burst) this hasn’t stopped financial commentators speculating on the outlook for Bitcoin.
One of the worries that have emerged out of this speculation is the impact the bursting of the Bitcoin bubble could have on the rest of the global economy. If Bitcoin turns out to be nothing but a scam, will it crash the financial system like turn of the century housing bubble?
Bitcoin Crash: Unlikely To Crash The World Economy
According to analysts at Capital Economics, the likelihood of a Bitcoin crash spreading to the rest of the economy is unlikely mostly because the total value of the crypto asset is still tiny in comparison to the size of other financial assets.
As the analysts point out, Bitcoin’s market capitalization is currently around $240 billion (at time of writing on 8th December. It has since risen to $280 billion), which is much smaller than the total value of gold outstanding ($8 trillion ) or the value of Apple (NASDAQ:AAPL) ($0.9 trillion).
Indeed, according to Cap Econ, even if the price of Bitcoin fell to zero, the paper losses would be equal to a 0.6% fall in US equity prices.
What’s more, it’s unlikely that a Bitcoin crash would hit the world banking sector as “Bitcoin is held and traded outside the banking sector,” which is one of its main attractions.
Another factor Cap Econ fails to consider is that an estimated 40% of the total Bitcoin market is controlled by just 1,000 people and an estimated four million (of the total 16.4 million in circulation) Bitcoin have been lost and may never be recovered. So, while the Bitcoin market capitalization may be estimated at $280 billion (at time of writing) it’s not clear how much of the market is available for trading and, as a result, it’s likely any fall out from a Bitcoin crash would be easily contained.