Three reasons why this bitcoin surge is not a bubble

Bitcoin’s new surge is different this time around, most digital currency specialists agree.

While it did surge several years ago, only to drop drastically in price again, this new resurgence is due to a variety of new issues not as present as in 2013 during the last rise in price.

Here are three reasons why:

1. Higher prices add value to the the entire digital currency system

 

Bitcoin market value and price (2013 – 2017)
bitcoin price over time

Source: CoinMarketCap

With many more new digital currencies, bitcoin has become the new default exchange value, with people selling other currencies into bitcoin before trading it for non-digital currencies. With the multitude of new currencies all using the same underlying block chain technology, it also reinforces both the platform in a general sense and specifically the success of bitcoin.

The block chain technology has spun off hundreds of new current and potential applications, and is creating its own technological markets. Much like the network effect of any new device or platform, the more people and businesses that use bitcoin, the more valuable the network is, and the value of the currency itself.

2. Financial institutions are beginning to buy bitcoin.

The more valuable that bitcoin becomes with individual investors, the more likely financial investment firms will want to add it to a balanced or risk portfolio. And like any commodity that has a spread between the buy and sell price, bitcoin attracts both individual and commodity traders that look at making money day or week trading bitcoins.

But financial institutions provide a different block of support. They don’t tend to buy and sell, but more “buy and hold”, thus locking up large amounts of bitcoins from the market, pushing the scarcity and thus the value of the remaining coins on the market. And as more firms look for less pricey alternatives in digital currency, they’ll also be subject to point 1, where often the easiest way to buy and sell alternatives to bitcoin, is with bitcoin itself.

Google search trends for “bitcoin” and “ethereum” (2012 -2017)

Bitcoin versus Ethereum google searches
Source: Google Trends

It is not by coincidence that the number of searches for “ethereum” follows the same trend line as “bitcoin”. And this will continue.

3. The real world finds more ways to use bitcoin.

Earlier this year, Japan recognized bitcoin as a legitimate and legal method of payment, opening up a number of new exchanges. And more online retailers are taking payments in bitcoin, allowing it to be used as a more common form of payment and not just a novelty way to purchase a pizza or gold online. Much like non-Visa or Mastercard credit cards, often it takes both years and a large enough user base (the network effect) to get more retailers to accept payment from those cards. Discover took years to get much beyond its Sears customer base and into widespread use through the various credit card processors and retailers.

When someone holding thousands of dollars of bitcoins could only buy pizza with it, the only alternatives were cashing it out into dollars or sitting on them and buying pizza once a week. Now there are hundreds of thousands of ways to spend or invest bitcoins, from buying furniture online from Overstock.com or getting an iOS app developed from GoLocalApps.com

Like any currency that has limited liquidity and use, bitcoin it not for every investor or individual. But this latest surge of value is more from the new value in bitcoin than the original novelty when it first launched.