To fully understand the bitcoin bubble and the eventual cycle of its value, we will draw instances from the traditional financial system that you’re most probably used to. Like currencies, bitcoin was designed to be a means of value exchange. Without its symbolic value, bitcoins like paper money will not have any real value. What we are trying to say is that it is its purchasing power that defines its value. Normally, a central authority takes charge of traditional currencies to keep it scarce using artificial measures. There are a lot of other reasons why a central authority has to take charge of traditional currencies, one of which is to prevent counterfeit money.
However, the last few years have seen money become more virtual. Salaries are paid and spent over the internet. This trend has made it increasingly difficult to monitor financial crimes, hence the need for a central authority to monitor and place restrictions on transactions. This makes it obvious that paper money cannot function properly without a central authority always keeping watch. This is where bitcoin comes into the mix. The online coins work in a special way that keeps circulation limited, and prevents counterfeit, without the need for a central authority.
A few years ago, people began to accept bitcoins for money, giving it value. As people began to accept bitcoins more for their products and services, its value began to skyrocket. With the trend continuing like this, people began to expect a rise in the value of bitcoin, hence buying to store, leading to more buyers and fewer sellers. Naturally, this inflated the value of bitcoin to an all-time high. Experts refer to this as speculation. It took only 10 months for the bitcoin to rise to $20,000. The question, however, is what part of this incredible rise we can attribute to the real market, and what part of it is due to speculation?