Are we in the midst of a bitcoin bubble? Perhaps, but that doesn't necessarily mean prices are on the verge of collapse. And, bubble or no bubble, some analysts believe bitcoin still has room to grow.
Former Wall Street analyst Henry Blodget says past price bubbles show that, in general, prices can rise much higher and bubbles can last much longer than most observers think.
"Internet stocks, for example, were first described as a bubble in 1995, a full five years before the peak," Blodget writes on Business Insider. "And the amount of money made in those next five years made everyone who was skeptical early on look and feel like a fool. House prices, meanwhile, were described as a bubble as early as 2002 and 2003. And it wasn't until 2007, many years later, that house prices finally peaked."
Bitcoin prices have been volatile this year, soaring above $250 in April before dropping down to the $50 range. Today's price is about $117.
So what caused the recent volatility? Blogger Jonathan Stacke speculates that media coverage criticizing bitcoin for its volatility has actually contributed to more volatility.
"As news coverage drove unfamiliar speculators into the market, the price continued to rise and interest continued to grow," Stacke noted in a recent article posted on The Genesis Block. "That is, of course, until fear of loss from a product most still don't understand drove people out of the currency en masse when prices began to slide, exacerbating the pullbacks. As press coverage waned and the short-term speculators left, volatility began to subside."
"Arguably the best thing that's happened to bitcoin in the past month is that people stopped talking about bitcoin," he added.
And there's always the possibility that the recent price actions surrounding bitcoin might not actually be a bubble, Blodget noted, pointing out that higher prices down the road could be a result of a healthy, developing bitcoin market.
"If bitcoins become an accepted currency everywhere in the world, if governments don't intervene and make bitcoin transactions illegal, and if the supply of bitcoins remains finite (if the systems aren't hacked or the anonymous creators don't get greedy and decide to create many more), then bitcoin prices could go much, much higher," Blodget wrote.
Blogger Farhad Manjoo -- who recently wrote about his bitcoin buying and selling adventures on Slate.com -- believes that, once the sites that manage bitcoin become easier to use, more people will buy the currency and "bitcoin will take off."
"There are some genuine uses for it as a currency -- there are plenty of people who want to transfer money anonymously, over long distances, for free," Manjoo wrote. "Bitcoin is the best way to do that right now. And because there are a limited number of bitcoins, as demand increases their value relative to the dollar will increase as well -- settling in at somewhere over $200, I'd guess."
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