A research study by two professors at USC Marshall shows that a bubble is a good thing for Bitcoin. Price bubbles and adoption can be mutually reinforcing and even benefit other cryptocurrencies.
People normally believe that the formation of a bubble around Bitcoin is a negative thing. However, a study by two professors at USC Marshall reveals that it may be something rather positive for the cryptocurrency.
Since mid-2020 Bitcoin remained on a bullish path, which allowed it to exceed its previous all-time high. In early October 2020, Bitcoin was trading at around USD 10,000. However, the pioneering cryptocurrency reached a price close to USD 40,000 in just about three months.
Even though these types of movements are not normal in traditional markets, they are in Bitcoin. Many people are starting to foster the fundamentals of a possible bubble around Bitcoin that could burst at any moment.
The term “bubble” has usually gotten a negative connotation purely because of when it could burst. However, the truth is that a bubble does not always have to be something negative.
A Bubble Can Be Beneficial
Investors usually give a negative connotation to the term “bubble.” The reason for this is that they relate it to the popular delusions and madness of the crowds behind the burst.
However, temporary excessive optimism about Bitcoin (or another cryptocurrency) sometimes forms financial bubbles. That may offer benefits to the crypto asset in the future, such as what happened after the Dot-com bubble.
USC Marshall Professor Yanhao Max Wei explained that volatility may be rather positive for Bitcoin as it promotes its mass adoption. He argues that a Bitcoin bubble can contribute to free and massive publicity for the cryptocurrency.
Investor Interest Awakens
Max Wei’s words are undoubtedly consistent with what is taking place. People were able to witness how the prices of Bitcoin rose during 2020. That situation caused the media to start talking about the cryptocurrency and its bold move again.
In this sense, Max Wei conducted a research study (entitled “Cryptocurrency Adoption with Speculative Price Bubbles”) jointly with his colleague Anthony Dukes. According to the results of the study, price bubbles and user adoption can be mutually reinforcing in the market.
Therefore, a bubble favors the adoption of Bitcoin and brings long-term benefits, even for the other cryptocurrencies. Max Wei explained that “price bubbles accelerate the growth of the Bitcoin user base. The expectation of those users is what fuels the price bubble,” said the professor.
Max Wei compared the effect of a bubble in Bitcoin to what happens “when a brand introduces limited-edition shoes.” The exaggeration surrounding the fall itself is what is striking about it.
The researcher said that scholars have tended to view price bubbles and user adoption separately. He added that his study points to the importance of the two interacting with each other. A bubble is beneficial for Bitcoin and other cryptocurrencies in terms of price and adoption.
By Willmen Blanco
