Raghuram Rajan, the economist who has correctly predicted the 2008 financial crisis said that he believes that Bitcoin is a ‘classic bubble’. The Indian economist thinks that the massive upsurge in Bitcoin and Tesla is an example of the bubblish behavior of the market.
Rajan commented on Bitcoin “I think one has to look around the world. Bitcoin reached $40,000 after being at $10,000 at the beginning of last year. So Bitcoin is the classic bubble, right, it produces no value. It is an asset, which can’t even be used for payment because it is really difficult. And yet it hit $40,000. So why are people buying Bitcoin, because they think it will go up. And that is bubblish thinking.”
While giving an interview to a media house Rajan said that we are going through a rebound phase, not recovery.
“You have to have a very firm view of their success, and the spread of the vehicles they make to justify the kinds of prices that are being paid. So it’s not as if everything is priced in a way we understand now, that doesn’t immediately imply that the bust is coming. There are certainly when people talk about it reasons to believe that there are underlying supports- the very easy monetary policy, the very low-interest rates, the fact that economies are in a rebound, I call it a rebound rather than a recovery because recovery means you go back to the place you were, we’re still way below the place we were, but we are recovering, we are rebounding quite fast. And especially in manufacturing, that rebound is showing up in, you know, good results relative to the previous year”, Rajan said.
His statement comes when the stock market of India is high rocketing and Sensex crossed the crucial 50,000-mark on Thursday. Rajan believes that government should not get lured by increasing stock market as it indicates the growth of large companies while many small companies are still suffering and struggling.
“There are lots of small investors with plenty of money sometimes from the transfer, sometimes from sitting at home and not spending it elsewhere, who are also punting on the stock market. So low-interest rates, the fact that manufacturing is back, and sometimes it’s showing healthy growth, the fact that many large companies are benefiting while small companies are going out of business. I don’t want to be a stock market sort of expert and tell you it’s going to go up by this much and so on. I don’t know. But I do think that it’s a good time to be diversified,” Rajan said.
Not just Rajan, Many other economists believe that bitcoin and other cryptocurrencies are ‘massive bubbles’ and its supply system is complicated. Even Economist David Rosenberg believes that Cryptocurrency is a bubble and the investors don’t understand its dynamics.
Rajan even commented about the consumption recovery, he said the demand by the rich is increasing while with the poor and middle class, we see no improvement. He also added that the government can’t ignore such a large segment.
“They cater to two different communities, two different groups, the upper-middle class are auto sales. The lower middle class and poor people are the two-wheelers. And that’s suggesting, as is true of absurdly industrial countries, that this is a two-speed process. The rich are, in part because the wealth is also tied to things like the Sensex. They’re doing pretty well. And the not so well off or not. And the question is, can we completely ignore that segment? Certainly, we can’t politically, but even economically.”