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  1. Investing
  2. Cryptocurrency

3 Big Reasons the Bitcoin Bubble Could Pop Soon

By:
Ryan Derousseau
5 min read
- Alain Pitton—Sipa USA via AP
Alain Pitton—Sipa USA via AP

Bitcoin prices hit $19,000 early Monday morning, as Bitcoin futures contracts began trading on the Chicago Mercantile Exchange (CME), offering investors even more ways to participate in the cryptocurrency craze.

While Bitcoin futures have been available for days — they actually began trading on the Chicago Board Options Exchange last week — they now enjoy a much wider audience. The CME is the world's largest futures exchange.

Bitcoin prices are now nearly 20 times higher than at the start of the year, and euphoria doesn't seem to be cooling off.

This morning, Bitcoin analyst Ronnie Moas of Standpoint Research, told CNBC that the cryptocurrency could soon be worth $300,000 to $400,000 based on surging demand and a limited supply. Last week, Chamath Palihapitiya, founder of venture capital firm Social Capital and co-owner of the Golden State Warriors, claimed Bitcoin will reach $1 million in the next 20 years.

Yet 51 out of 53 economists polled last week by the Wall Street Journal say they think Bitcoin is in a bubble. Here are three things that could pop that bubble.

1. Bitcoin Futures Are Here

Yes, the same financial instrument that helped boost the price of Bitcoin in recent days is a double-edge sword.

For starters, futures contracts allow investors to do something they haven't been able to do before. Risk takers can now bet on whether Bitcoin prices will rise or fall.

What's more, because futures contracts are derivatives, they allow investors to bet on the movement of the underlying assets (in this case, Bitcoin) without actually owning that asset.

Why is that important? Investors can now scratch their cryptocurrency itch without having to actually buy Bitcoin on the open market. In theory, then, demand for the actual cryptocurrency could wane — driving prices down — even as psychological interest in Bitcoin continues to grow.

2. Governments Are Watching

A big part of Bitcoin’s appeal is that it’s unregulated and somewhat anonymous. This provides it advantages that traditional currencies lack — but also creates an Achilles' heel.

And that's the chance that governments will try to regulate it.

The chairman of the Securities and Exchange Commission, Jay Clayton, has already fired a major warning in that direction. Clayton wrote “there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”

While some may argue that the SEC has no business regulating cryptocurrencies because it’s not a security, Clayton points out the SEC does analyze the dollar and other currencies in how they impact the securities market. “We have the same interests and responsibilities with respect to cryptocurrencies,” says Clayton.

Essentially, he’s reminding investors that the SEC is watching.

The Commodities Futures Trading Commission, which approves futures contracts listed on the CBOE, supported Clayton’s comments.

3. Technical Hurdles Linger

It’s rare to see a currency move like Bitcoin has, with a handful of exceptions: Bitcoin’s competitors.

One new player in the cryptocurrency space, Litecoin, has seen its price tag tripled to above $300 in just six days. Ethereum’s price more than doubled in one month to over $700 per coin. This jubilance in the crypto space has soared even though the actual transaction volume of cryptocurrencies has remained fairly steady.

Yet if more people want to actually use these digital currencies, the technology must improve.

The platforms that process transactions haven’t progressed to a point that’s scalable. It means Bitcoin can only process a handful of transactions a second, according to Emin Gun Sirer, a Cornell professor who spoke to Wired about the currency. Traditional payment processors, like Visa, process thousands of transactions a second.

This scaling issue has yet to hold cryptocurrencies back as an investment. Investors are simply assuming that Bitcoin (and its rivals) will somehow become scalable currency.

If they're wrong, however, that could be the assumption that derails the cryptocurrency.

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