Why Bitcoin is not a Bubble

The main reason people believe that Bitcoin is a bubble is because they don't know what a bubble is.

Let us try to clarify this financial phenomenon by analysing the typical aspects of a bubble. Bubbles are characterized by:

1. Rapid escalations in the prices of assets: we know historically that speculative bubbles are formed in a time span between 3 and 5 years.
2. Fueled by speculation: after the first capitals have been allocated, the bullish information reaches the population, which in full speculative euphoria begins to buy that asset.
3. The escalation is not justified by the underlying fundamentals of the assets: as mentioned in the previous two points, if the asset is not supported by a real value, what you create is a house of cards.

Bitcoin satisfies the first prong and maybe satisfies the second. Everyone is talking about Bitcoin and extreme predictions about its future price are being made. The question is whether this price escalation is justified by the underlying fundamentals.

The Internet was a technological disruption. Blockchain technology is another technological breakthrough. The first application of blockchain technology was Bitcoin, which might compare to email being the first mainstream application of the Internet. Unlike email, which is unlimited and has no variable cost, there is a fixed amount of Bitcoin and a transaction fee to use the Bitcoin network. 

How can we explain Blockchain better?

Blockchain is the part of the economy that was missing from the internet, that part of the economy that serves to give value to everything present in the net.

Every transaction that obtains the consensus is executed and signed, finally fixed and stored within the blockchain. This system allows blockchain to take a step forward, for the previous steps there is already an internet that stores the data, and the digital signature that certifies them, but the real innovation of blockchain consists in certifying the relative history and order of each transaction. Thanks to this potential, blockchain makes it possible, for the first time, for distributed networks to transmit signed messages and to ensure that the players in the exchanges agree on the order of messages. In this way the blockchain can convey not only information, but finally can also convey value. The issue is to understand the difference between the transmission of information, which does not lose value to those who give it, and the transmission of value or property, which impoverish those who transmit it and enrich those who receive it. On the basis of this concept we can deduce that if there is a transmission of wealth there is also scarcity and therefore there is value. Blockchain is a disruption because it creates value. In a context of scarcity you can build a market, so contracts, money, incentives, and coins, such as Bitcoin.

What makes Bitcoin a valuable asset?

At its most basic level, Bitcoin allows value to be stored and sent from one party to another, anywhere in the world, without any third-party intermediary facilitating the transaction. To use the Bitcoin network, users pay a fee. Currently, people pay about $1.5 million/day to use the network. This does not include the value being transferred, which also requires Bitcoin, but rather how much people are willing to pay to use the service. This is an increase of about 1500% YTD and 4000% over the past year. These exponential growth rates are not new, as daily transaction fees grew threefold in 2015 and tenfold in 2016. Going forward, if transaction fees grow at a rate comparable to 2015 (i.e. threefold annually), daily transaction fees would clear $1 billion six years from now. If the growth rate is closer to 2016 or 2017, it will happen much sooner. Bitcoin transaction fees historically average a little less than 1%, but for simplicity’s sake, assume a 1% fee. This would imply that $100 billion worth of Bitcoin would be transacted daily (currently about $10 billion).

Mining makes value

Bitcoin mining is a brute forcing operation in which the aim is to find the number to be inserted in a set of data (the header of the block) such that the double hash SHA-256 of such data is less than a certain target (target), target that is calculated on the basis of the coefficient of difficulty: the greater the difficulty, the lower the target is and the greater the attempts to find the aforementioned number will be.
Practically, computer running the mining program receives the header of the block that you are trying to close from a properly configured client (mining only) or via the internet from a dedicated server (pool mining). A number is added to this header,"nonce", and double hash is calculated. if this hash is numerically smaller than the target, the header is sent to the server for approval, otherwise the nonce is increased by one and the control is repeated. This operation is carried out several million times a second, as many as there are MHash/secs reported by the mining program.
It should be noted that mining is a statistically pure process: every hashing attempt has the same probability of being the good one. It makes no sense to say that a certain number of hashs or time is needed to close a block, you can only talk about mean. 

There will only be 21 million bitcoin. Approximately 16.5 million exist, but experts estimate that at least one million has been lost forever. This and Bitcoin’s other uses, such as store of value, put downward pressure on the tradeable supply. Given the limited supply and potential growth described above, a supply and demand analysis suggests that Bitcoin’s price may not be so outlandish and may still have room to grow if individuals and companies began to accept it as a payment method for the provision of goods and services. In fact, a key benefit of bitcoin is known as “censorship resistance,” its ability to be used for transactions that could normally be censored by other payment networks.

The future business

Token facilitate the next generation marketplaces, especially data dependent marketplaces. Crypto has fallen and resurrected many times, unlike traditional bubbles. While some platforms and tokens may fail it doesn't mean that the revolution will stop. The stock market didn't go away after each bubble and the internet didn't go away after the dot com bubble. The companies that survived and the companies that were created during the dot com bust are doing very well because they disintermediated many traditional business that stuck to doing things the same old way.

Too often people forget Bitcoin is not just a currency but an ecosystem, users who pay miners to secure a decentralized store of value. It's certainly not vaporware.