Bitcoin: Are You Buying The Hype?


  • Bitcoin value has a high correlation to amount of Google inquiries
  • Speculation in blockchain tech and bitcoin has led to overvaluation

  • Emerging technologies, like bitcoin, follow the “Gartner Hype Cycle”


By Austin Thiele

By now you have probably heard the word “bitcoin,” either on the news, social media or among peers.  Bitcoin is an online cryptocurrency that uses blockchain technologies, which allow for the storage and exchange of Bitcoin.  To make transactions using Bitcoin, a Bitcoin wallet from a phone’s respective application store must first be downloaded.  With this wallet, users are able to store and use their bitcoins.

 

Bitcoin was formed back in 2009 by Satoshi Nakamoto, and in April 2017, one bitcoin was worth approximately $1,223.  Merely five months later, a bitcoin today is valued at $3,916, more than a 300% increase in price.  What is driving Bitcoin to soar ever higher?The answer to that question can be answered by the observing the “Gartner Hype Cycle,” seen below.


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This cycle is used to illustrate expectations of new emerging technologies.  To the left is the Innovation Trigger, beginning the cycle with a breakthrough in potential technology, which subsequently triggers media interest and publicity in this technology.  It was here where Bitcoin was in its infancy: it could be purchased and stored in one’s digital wallet, but the locations where it could be used were extremely limited.  

 

The Peak of Inflated Expectations follows next in the cycle, and it is here where parallels between Bitcoin right now and other emerging technologies can be observed.  This peak is brought upon by some successes (amid many failures), spurring some companies to take action and seize what they perceive as a potential opportunity.  For Bitcoin, numerous retailers now accept the cryptocurrency, including: Overstock, Newegg, Expedia, and Dish Network, which only increases expectations about Bitcoin’s performance while hiking up the price.

 

As more people learn about Bitcoin and continue to speculate on the expectations of the technologies behind it, we can expect to see more growth.  However, if Bitcoin does follow the Gartner Hype Cycle, as most emerging technologies do, we can anticipate that this sharp peak will be followed by a sharp trough: the Trough of Disillusionment.

 

If Bitcoin does follow the cycle, then a Bitcoin bubble has formed.  Inflated expectations have led to speculation and overvaluation of Bitcoin as the public becomes more aware of its increasing value.  Examining a Google Trends chart of the term “bitcoin” in the United States supports this.

 

As inquiries of Bitcoin continue to rise, its value has risen exponentially compared to the advances in the underlying technologies.  However, the question to be asked is: Can this value last?  As some firms take action in adapting to Bitcoin, there are many naysayers in the market who will tell say it won’t.  Ray Dalio, the founder of Bridgewater Associates, one of the largest hedge funds in the world, compared the activity of Bitcoin this year to the 1999 dot-com bubble, where many tech companies became overvalued due to over speculation.  As one can imagine by looking at the Gartner Graph Cycle, this bubble’s peak in prices was countered by its collapse, making internet company valuations plummet.  Regarding Bitcoin, China’s regulatory bodies recently have outright banned the use of cryptocurrencies, causing the price of Bitcoin to drop, which it continues to do.

  

In conclusion, people’s expectations in emerging technologies follow the “Hype Cycle,” where excitement and over speculation of an emerging technology results in a bubble that is ultimately popped, characterized by sharp peaks and troughs on the curve.  Bitcoin’s drop is inevitable, if history can teach us from the dot-com crash, although that drop may be coming sooner than many anticipate, for Bitcoin appears to be reaching its Peak of Inflated Expectations.  Though Bitcoin is not a physical form of currency, it is still subject to gravity — what comes up must come down.


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