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Is bitcoin in a bubble? It wouldn't be the first.


The price of bitcoin has doubled four times this year: from around $1,000 in January to $2,000 in May, to $4,000 in August, to $8,000 in November and finally to $16,000 earlier this month. (Update Jan. 4: Bitcoin peaked above $19,000 Dec. 16. It closed above $15,000 Jan. 3. Check current price here.)

This meteoric rise has led many to ask, is this a bitcoin bubble? The answer is complicated, but one thing is clear — if it is a bubble, it isn’t the first.

“People have forgotten that we used to call 2013 the big bubble,” said MIT Sloan assistant professor Christian Catalini, who researches cryptocurrencies and blockchain. “The price spiked at $1,000 from almost nothing — from $100 to $1,000 within a few months. And then it came back down.”

In early 2013, bitcoin was trading below $30 — the March 2013 introduction of Bitcoin Version 0.8 and the Internet Archives’ acceptance of it drove the price above that for the first time. This caused a spike that April that reached $266, only to crash to $60 quickly thereafter.

The price continued to climb again throughout 2013, rising to its highest price after American regulatory officials spoke at a Senate hearing, saying that digital currencies were a “legitimate financial service.” According to the Mt. Gox bitcoin exchange, bitcoin’s price peaked at more than $1,200 that November, but after China said that bitcoin could not replace traditional currency in the marketplace, its price soon began to fall again. The price of bitcoin continued to slide for the next two years, trading at less than $200 at the start of 2015.

“After that first bubble and crash the price started growing much more organically,” Catalini said. And it continued that way for a while, until earlier this year the price of bitcoin began to skyrocket again.

What has brought about the most recent rise? “Bitcoin responds to expectations about the future chance that bitcoin will become a major financial pipeline,” Catalini said. So recently, when bitcoin began gaining interest from institutional investors, and news hit that the Chicago Mercantile Exchange started trading in bitcoin futures — and NASDAQ plans to start doing the same next year — that raised interest in it. “When people talk about the bitcoin price, it gets in the news and more people want to invest. The market is such that even small numbers of people across the globe can drive substantial price increases,” Catalini said.

Catalini cautioned that people shouldn’t invest anything in bitcoin they can’t afford to lose. “This is like gambling. People need to realize that their bitcoin could be worth not a lot in the future if things go wrong, or it could appreciate in value.”

What can we expect in the future from bitcoin? “A lot of the volatility and instability we see in the market has been driven by the fact that we are still trying to figure out exactly how bitcoin will evolve,” Catalini said.

The question remains, is bitcoin in a bubble? If so, it isn’t the first time, and Catalini thinks it may follow a similar trajectory now as it did in 2013. “There may be some correction in the market in the near term, and then the value may start growing again in a more orderly manner. Ultimately, bitcoin will only have value if society agrees it has value. For this to happen, it needs to become a better medium of exchange and store of value. Many experiments are taking place within this space, so you can expect more competition and innovation as different cryptocurrencies and tokens are designed to solve different types of problems in the economy," Catalini said.

For more info Zach Church Editorial & Digital Media Director (617) 324-0804