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How will we know when the Bitcoin bubble has burst?

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Back when the dotcom bubble burst, I wondered what the next one might be. I never imagined it would be something that’s totally made up, has no real-world use — and that gullible punters would pile into with gusto.

Taking of gullible, I saw a scam this week of a faked page of a national newspaper carrying stories of celebrities using Bitcoin to rake in the cash. It even claimed it was done live on a popular daily TV programme, with the presenters making hundreds of pounds while the programme was running. Presumably people fall for these things.

But Bitcoin really does have no actual rational use, being totally unsuitable as either a currency or an investment with any lasting value, as I’ve explained before. Well, it’s perhaps useful as a test for blockchain technology (which is genuinely something good, though we don’t really understand its full potential yet), but you’d have to be barking mad to put your investment cash into the thing.

Burst?

With Bitcoin at around the $3,400 level now, down from $19,783 at its peak, it might seem obvious that the bubble has burst. But if you listen to what they’re saying in cryptocurrency circles, it might not seem like it.

Looking around, I see the Smartereum website quoting an analyst who apparently believes that “a lot more money is going to come into Bitcoin, [it] will go up around $30,000-$35,000 this year – next couple of years? $100,000.”

$100,000 per coin? Seriously?

Elsewhere I’ve heard enthusiasts claiming that massive price swings are to be expected in “cryptocurrency space” and that if your coins go up and down in value by 70% or 80%, or whatever, that’s fine. The Motley Fool is far too polite to let me publicly use the words that immediately spring to mind.

I’m a big believer in ignoring short-term volatility and looking at the long-term value of investments, but they need to be investments with an actual value in the first place.

It gets worse

And if such nonsense isn’t enough for you and you want something that’s even one step further away from a proper investment, did you know you can trade in Bitcoin futures too? To me that’s a bit like betting on the horses, and then also betting on whether you’re going to win on the horses. Sheer madness.

I’ve read about bubbles inflating and bursting, and I’ve seen it happen in my lifetime too, but the one thing that genuinely puzzles me about the Bitcoin bubble is that it hasn’t fully deflated yet.

No panic?

The economist Hyman Minsky’s theory of financial instability identifies the steps in a bubble as displacement, boom, euphoria, profit-taking and panic. Displacement is the beginning when some new fad or fashion takes over people’s minds, and the rest seem self-explanatory.

We’ve certainly seen the first four stages, but I really don’t see the panic stage as having happened yet. And I don’t think we can declare a bubble as fully burst until that happens.

But we’ve seen a renewed fall in the Bitcoin price since mid-November, so the final panic stage might be starting. But whatever happens, there are more realistic ways to become a millionaire.

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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.