Almost all the experts have said in recent months that Bitcoin is a speculative bubble. Therefore, the recent roller coaster price trend of the main cryptocurrency cannot surprise too much. The real question is whether the bubble is bursting or not. The fixings of recent days give signals, albeit not unequivocal, that deflation could also be achieved in the short term. Leaving to others the task of investigating the pros and cons of Bitcoin (see, for example, the three contributions published by Francesco Marchionne on First in recent weeks on thecryptocurrency inflation, the weak side of the virtual currency e its five qualities), I will focus on the cyclical trends of its price.
It is useful to remember that still at the beginning of December 2017 the price of Bitcoin was around $10.000. Then the exuberance connected with the quotation of the cryptocurrency had brought its price to almost double in mid-December. Since then, however, despite fluctuating trends, the declines have prevailed for about a month. So much so that in mid-January the price had returned to 11.000 dollars. After that, for about two weeks, the price seemed to settle around that level.
That changed on Jan. 30, when a 10% drop dropped the price below the psychological $10.000 mark, and like a boxer, Bitcoin dropped another 11% on Feb. 1, dropping below the $9.000. During the day on Friday, February 2, the price flirted with $8.000, values not seen since the end of November 2017.
It would be risky to predict what the future trend will be. However, the feeling is that the price of Bitcoin is experiencing a loss of support. For example, it has not been since time immemorial that it has not linked two days so close together with losses of 10% or more. And history teaches us that, losing support, the bubbles suddenly deflate.
In fact, one of the most accredited theories to explain speculative bubbles is that which identifies it in the coexistence of rational investors and uninformed investors (noise traders). On the one hand, rational investors buy Alfa stock when they believe the price is below the stock's fundamental value and sell if the opposite occurs. Instead, uninformed investors, unable to estimate the fundamental value of Alfa stock, buy and sell based on their gut feelings, usually by extrapolating Alfa's current price path into the future.
The speculative bubble forms when, for some reason, the price rises and, at the same time, a growing share of uninformed investors enter as buyers of Alfa. The price of Alfa therefore tends to rise almost automatically, reaching well above the fundamental value and inflating the speculative bubble. In this phase, even in the event of temporary retreats, the price of Alfa finds support as long as it is supported by the entry of other uninformed 'latecomers' investors who follow the herd effect. This will continue for some time, until the herd effect wears off and some bad news about Alfa causes some investors to sell. At that point, no longer having the support of the herd effect, the price loses support and the bubble deflates rapidly.
In the case of Bitcoin, as has been observed for some time (see, for example, Kristoufek, Ladislav. 2013 "BitCoin meets Google Trends and Wikipedia: Quantifying the relationship between phenomena of the Internet era." Scientific reports 3: 3415), the fundamental value cannot even be estimated and, therefore, the price of Bitcoin ends up being determined only by uninformed investors looking for very short-term speculative profits. Therefore, the loss of support of Bitcoin observed in recent days could herald a sharp fall in the price. And the fact that by now the majority of trades is the result of orders given by automatic trading guided by mathematical algorithms can contribute to increasing the speed of the adjustment. I repeat: there is no certainty but it is good to be ready for a strong adjustment.
