It is not the asset that is bubble-prone, it’s the way people react to it, and debt buying is dangerous.
Joseph Borg, president of the North American Securities Administrators Association, explained how he had seen people putting their houses for mortgage in order to buy Bitcoin in a frenzy of not wanting to miss out.
It is a worrying trend, as these decisions are foolhardy to say the least, but moreso, they are dangerous — as they have preceded other bubbles in the past. While the product (dot com sites, or housing) is not necessarily bubble-prone, the way in which people react to it can cause a pop.
Bitcoin is a speculative market, and it is in a feeding frenzy at the moment as people try and get in on the wild ride. But moves like buying Bitcoin in debt could lead to a catastrophic end for the currency.
Hallmarks of a speculative bubble
Bubble talk has dogged Bitcoin since before 2014 when it hit $1,000, with some saying it is in a bubble, ready to pop, others saying it’s just the beginning, and others not even caring, just looking to profit.
Really, there is no way to tell if this is a classic bubble scenario, but what is evident is that there are signs that it could be. However, the caveat to that is again that it is not the product that causes the pop, it is the reaction of people.
Angela Walch, a law professor at St. Mary’s University in Texas who studies cryptocurrency and financial stability, spoke to Vice about the speculative nature of Bitcoin and its potential to turn into a bubble if silly decisions keep flourishing.
Some of the factors to consider when trying to find a potential bubble are already evident according to Walch:
“Some of the hallmarks to me involve the FOMO idea—the fear of missing out and never being able to get in. People see other people making a lot of money and they just want in on it. The housing bubble is a good example of that. People thought another person would always want to buy their house from them at a higher price.”
Another aspect that she notes that is similar to other bubbles is the hype:
“It’s the way people are talking about it. The media just continues to talk it up, and the people that the media interview are, too. And people keep saying, “This time is different. It’s not a bubble.” Another feature of a bubble is the failure of people to understand what they’re investing in at all. They forgot that. People are making money, so they just want to jump in.”
Don’t put your house on it
However, these signs pale in comparison to some of the more extreme measures people are taking to get involved, and it is those who are going into debt to buy Bitcoin that are the true concerns.
“I saw that headline [about people mortgage their house for Bitcoin], and that really frightened me, because taking out debt to invest is how people end up getting into trouble. That was at the heart, in many ways, of the financial crisis. People thought their investments could only go up, and when they went down, they couldn’t pay back the debt. If enough people do that and can’t pay back their debt that they borrowed to buy Bitcoin, the lenders can eventually be affected by that, and it can just spiral through the system.”
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Author: Darryn Pollock