Bitcoin prices crash by 11%. Is the cryptocurrency overvalued?

Bitcoin prices crashed 11% on Tuesday morning and is currently trading below the mark of $50,000 at $49, 379 level. Not only Bitcoin, but other popular cryptocurrencies such as Ethereum and Litecoin also plunged on Tuesday morning.

Sumit Gupta, CEO & Co-Founder, CoinDCX, a cryptocurrency exchange, said, “After reaching an all-time high of $58,000, Bitcoin saw a price correction today. This was expected as markets go through such correction cycles. However, the market showed signs of recovery after falling nearly 17%. Investments in Bitcoin, like any other asset, should be from a long term perspective as the fundamentals are still going strong. Hence it is advised that investors buy the dips and hold with a long term perspective.”

Elon Musk, the world’s richest man, tweeted his concern over the weekend that the price had risen too high too quickly. His company Tesla has recently invested $1.5 billion in Bitcoin.

While cryptocurrencies are plummeting, the US treasury secretary Janet Yellen also said that Bitcoin is “highly speculative” and “inefficient” for transaction. While addressing the 2021 DealBook DC Policy Project she said, “Bitcoin is an extremely inefficient way of conducting transactions and the amount of energy that’s consumed in processing those transactions is staggering.”

Is Bitcoin a bubble ?

The latest report from J P Morgan report titled “Digital transformation and the rise of fintech: Blockchain, Bitcoin and digital finance 2021” states that Bitcoin has already achieved the fastest-ever price appreciation of any must-have asset to which it is often compared, such as gold (1970s), Japanese equities (1980s), tech stocks (1990s), Chinese equities (2000s), commodities (2000s) and FANG stocks (2010s).

The report states, “We estimate about $11bn of cumulative institutional flows into Bitcoin since the end of September, but we believe that a significant component of institutional flows into Bitcoin reflects speculative investors seeking to front run other more real-money institutional investors. We believe Bitcoin, at current market prices, has already surpassed gold in risk capital terms.

Tesla’s recent announcement that it has invested $1.5bn in Bitcoin or 8% of its corporate cash reserves surprised markets by the magnitude of the purchases and re-invigorated expectations that other corporates will follow with their cash reserves. Irrespective of how many corporates eventually follow Tesla’s example, their announcement abruptly changed the near-term trajectory for Bitcoin by bolstering inflows, although the longer-term implications for Bitcoin prices remain unclear. ”

Vikram Rangala, CMO, ZebPay, another cryptocurrency exchange, earlier said when Bitcoin crossed $50,000 mark for the first time, “This latest high for bitcoin is not the big news. The big news is why. It’s not just speculation. It’s smart value investing by institutions, individuals, and even governments in a breakthrough technology. Bitcoin is an inflation-proof, corruption-resistant store of value backed by more reliable and transparent accounting. That is real value. In the near future, we’ll see $60,000, $70,000 and $100,000. In between, we’ll also see volatile dips and the usual reports about the bubble bursting. Bitcoin isn’t a bubble. It’s a part of our economy now.”

There are challenges around determining intrinsic value of Bitcoin. With lot of institutional money started chasing Bitcoin, experts say it is a tricky call and only time will tell whether bitcoin is a bubble or not.