Whether Bitcoin is living a bubble or not is still an unknown. It is very difficult to predict the bubbles when you are inside them and only when a few years have passed since the peak can you assure yourself that the past was irrational. But of course all the bubbles have their gurus, those who correctly predict the future, and there are already experts who say that Bitcoin is living one.
Now, how will this explosion of the bubble that these experts predict? There is no consensus. There are multiple reasons why a bubble may explode and more in the case of a cryptocurrency such as Bitcoin, with certain legal and technical peculiarities that other financial products do not have.
Panic and descent
The first way in which Bitcoin can be downloaded is the classic mechanism by which all bubbles explode. Without there being a specific reason many investors start to collect profits and then the Bitcoin begins to fall in price. This calls other investors to sell and feed back down. In the end there is a seller panic and the falls are abrupt (within what the system allows).
If once overcome the panic a consensus is created that Bitcoin really does not make sense, that it is a simple virtual "game" and that there was no sense in investing in it, the price does not recover. That is, just as there is a certain consensus (or at least the money of many investors think so) that Bitcoin is a meaningful investment, if the consensus changes and there is no real support behind, the price can plummet in a definitive and lasting way.
This does not happen when the financial asset has a backing. For example, there may be a stock market panic with Zara's shares, but if sales are still strong when the quarterly accounts are published, the stock recovers. Behind Bitcoin there is nothing and therefore a panic can really be an explosion of the bubble.
Who thinks that something like this can happen? The great Bubble Guru, Robert J. Shiller, Nobel Prize in Economics for his work in the valuation of assets, predicted in advance both the dot com bubble and the real estate bubble in the US. And he thinks that Bitcoin is living a bubble and that its prices, sooner or later, will fall.
Regulatory problems
But Bitcoin is not a financial asset in the classical style. It may have other types of phenomena that push its price downward. And one of them is a great regulatory crisis. What does this mean? Well, the governments of the world consider that it is necessary to fight against Bitcoin, since it can be used for criminal activities and evade capital controls.
It is not a slight risk, but quite the opposite. Some countries, such as China and South Korea, are actively combating the use of Bitcoin. For the moment in a mild way, prohibiting the ICOs in the case of China and prohibiting its commercial use in the case of South Korea, but could go further. In fact there are countries (yes, somewhat authoritarian) where Bitcoin are firmly prohibited.
Some experts like Joseph Stiglitz, winner of the Nobel Prize in Economics, propose to completely ban Bitcoin while it is anonymous and the transactions have no explanation. Others, like Mark Haefele, Chief Investment Officer of UBS Group AG, are also categorical: they do not invest in Bitcoin because it would only take a terrorist attack in the US, financed through Bitcoin, for regulators to take it much more seriously.
If Bitcoin is experiencing a regulatory crisis, all the euphoria we have experienced in recent months may fade and only the real fans of virtual currencies and anti-state groups will remain. Of course the risk of such a crisis is very real.
Hacked
Another problem that can destroy the value of Bitcoin are hacks. It is not the first time that an exchange is hacked, in fact the case of Mt. Gox is several years old. The consequence of said hacking was clear, the value of Bitcoin plummeted. But the volume was still small and new investors not chastised continued to enter. To this day a hack of a large exchange can be more decisive and sink the value significantly and durably. And is that these hacks are quite common, the last one only a month ago.
Anyway there is an even greater risk than the hacks to the exchange (which are like the Bitcoin banks). And is that the Bitcoin algorithm, the design behind the blockchain, is not safe. It is based on SHA-256, which today is considered safe, but a vulnerability in this hash algorithm could cause the entire value to vanish. A failure of this style would surely sink the value of a definitive form, although it could be solved with an agile change of the algorithm (which is far from simple).
Scalability technical problems
Bitcoin has other problems, this time technical. And is that growth is showing that it has scalability problems. On the one hand, the commissions on transactions at current prices are outrageous, so much so that a Bitcoin conference has decided to stop accepting Bitcoin itself as a means of payment.
Another debate is that of energy consumption to maintain the Bitcoin network. And although energy consumption is usually talked about very cheerfully, the truth is that the energy cost per transaction is significantly higher than other more traditional options such as credit card payment.
These limitations could reduce the use of Bitcoin and cause its price to be reduced, even to initiate a collapse of the supposed bubble. In fact there are very well-founded criticisms about the implications of these technical problems.
Other reasons why Bitcoin could collapse
Although reviewed above are the root causes by which the value of Bitcoin could sink, the truth is that there are some other, although less powerful. The first is that a fork arises that makes Bitcoin become a minority (for example to eliminate or correct technical problems). The certain thing is that it is improbable, already there have been some attempts that have not congealed. And although it triumphed, it can not be said that Bitcoin has sunk if a Bitcoin B arises that continues to work.
On the other hand, the emergence of financial derivatives to invest in Bitcoin has been pointed out by some as a tool that can sink the prices of Bitcoin, since betting on the downside is simpler. Here there is much controversy since it is not at all clear that derivative products can affect the value of the underlying. My personal opinion is that no, they can not affect its value. And less in the case of Bitcoin, where there are much more grotesque manipulations, both by the exchange and by individual investors.