Bitcoin: What’s the worst that would happen if the crypto ‘bubble’ bursts?

Bitcoin has crossed over the $US11,000 mark — briefly — as it continues its whirlwind end to the year.

It’s more than welcome news to investors, who are embracing the increasing value of the digital currency, but market analysts are a bit more sceptical.

Here’s why some are predicting a bitcoin crash and what would happen if it does.

ICYMI, Bitcoin is going crazy right now

Bitcoin is a type of digital cryptocurrency that first emerged in 2009.

What is Bitcoin?

  • A digital cryptocurrency
  • It operates on a decentralised peer-to-peer network, with no central authority or government backing
  • They can be bought with fiat currencies like Australian dollars from online exchanges or created through mining

The reason why everyone keeps talking about it is because it’s increased tenfold in its value since the beginning of the year, and is currently worth more than $US10,000 after its value more than doubled since the beginning of October.

“The bitcoin phenomenon is almost unprecedented,” John Noonan, senior forex analyst at Thomson Noonan, said.

“I’ve never seen anything like it, certainly in my 44 years.

In fact, the cryptocurrency’s current market capitalisation — its price multiplied by the number of coins that have been released into the system — is roughly $US214 billion, according to industry website Coinmarketcap.

To put that in perspective, that is equivalent to the combined market cap of the Commonwealth Bank (at $140 billion) and National Australia Bank (at $80 billion).

Mr Noonan told ABC News Breakfast there are a few reasons that make bitcoin an attractive bet to some investors, including the fact it does not have a central bank and that there is a limited supply of bitcoins.

One of the other factors credited with driving the prices higher has been the announcement that investors will soon be able to bet on bitcoin futures. Even the Nasdaqis reportedly looking at getting in on that.

There’s also a great deal of hype going on, fuelled somewhat by the intense media coverage it’s been getting lately.

That means some are predicting a crash

Some experts and economists see the massive growth in bitcoin value over a short period of time as an indication that people are buying because of the hype. They appear to see it as a risky investment at best, extremely volatile at worst.

It took 834 days for Bitcoin to top $US1,000, and another 1,270 days to hit $US2,000 on May 20, 2017. But in the later half of this year alone, it has already surpassed $10,000.

It’s why analysts are comparing it to Tulip Mania and the dot-com crash. Bloomberg’s Stephen Gandel has even estimated that based on valuation, bitcoins are four times more expensive than dot-com stocks were at the height of their bubble.

Over the past two years, the digital currency has experienced numerous crashes, usually every couple of months…

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