Has Bitcoin burst? Will it repeat the mistakes of several major bubbles in history?

Bitcoin’s recent volatility has given market watchers a new sense of urgency, re-raising a question that has been fretting over much of the past year: Will Bitcoin plummet into one of the most notorious bubbles in history, alongside tulip mania and the dot-com bubble?

Bitcoin's previous enthusiasm (the cryptocurrency has fallen 48% from its Dec. 18 high) suggests investors have reason to be concerned.

As shown in the figure, Bitcoin has skyrocketed nearly 60 times in the past three years, which is indeed extraordinary.

That momentum dwarfs the Nasdaq Composite’s rally at its peak in the 1990s. Going back further, Bitcoin far surpasses the Mississippi Bubble and the South Sea Bubble of the 18th century, and even the Dutch tulip mania of the 1530s, though comparisons to Bitcoin should be made with caution given the scarcity of records of tulip values ​​(the chart includes the price of only one tulip variety; there is no post-peak price data).

Bulls say Bitcoin's boom is far from over and that analyzing the market involves more than just measuring price gains. While the recent plunge has alarmed some investors, Bitcoin has rebounded from losses of more than 50% many times before. If Bitcoin does become widely accepted digital gold, as Cameron Winklevoss expects, then Bitcoin could have a lot of room to rise.

Report: Hedge funds riding the cryptocurrency storm recorded returns of more than 1,000% last year

There’s more than one way to analyze the rally. On an annualized basis, bitcoin’s three-year rise is slower than some of history’s biggest bubbles, notably the Mississippi and South Sea bubbles.

However, skeptics abound. Howard Wang of New York-based Convoy Investments LLC and Jeremy Grantham of GMO LLC have analyzed bitcoin’s gains relative to past crazes and believe they are unsustainable. Grantham summarized his concerns in a Jan. 3 letter to investors:

“With no clear fundamental value and largely unregulated markets, coupled with a storyline of delusional exaggeration, this is the essence of a bubble that’s right out of the history books,” said Grantham, who helps manage about $74 billion in assets as GMO’s chief investment strategist.

Grantham has a 50-50 record of success with such warnings. While he correctly called the 1990s tech stock surge a bubble, he exited too early and missed out on some of the market’s biggest gains.

Only time will tell whether Grantham and other bears are right or wrong when it comes to Bitcoin, or if it’s too early to make their call.