Will the Cryptocurrency Bubble Burst?

Even if you don’t pay attention to bitcoin and other cryptocurrencies, you may have noticed that their value plummeted last week, with the total market value dropping from a high of $3 trillion last year to around $1.5 trillion in a matter of days. . The value of Bitcoin, the most famous and largest cryptocurrency, has fallen from $69,000 to a low of $33,000. This means that if you have recently invested in bitcoin or any cryptocurrency, chances are you have just taken what experts call a “bath”.

But there is nothing unusual about this. Cryptocurrencies are volatile and always have been: in just the last 12 months, there have been two massive drops in the value of bitcoin. This is one of the reasons why crypto enthusiasts always say HODL (hold on with all your might) to each other. These dips are not unexpected and eventually the value usually returns to new heights.

However, due to this latest volatility, some are questioning the fundamentals of the cryptocurrency, especially the claim that it is a good “safe haven” for hedge investments like gold. However, safe harbors are expected to be resistant to inflation and market volatility. Gold bugs love gold because its value stays the same even when other markets flip. The same cannot be said for Bitcoin and the other 17,000 or so cryptocurrencies on the market.

Where does the value of a cryptocurrency come from?

Cryptocurrency is hard to understand because it is just a computer code. Every cryptocurrency is built on what is known as a blockchain, a really nifty piece of code that keeps track of transactions in an incredibly secure and public way. This makes it almost impossible to change the transaction record, but also provides anonymity and confidentiality.

The main reason why crypto has any value is because people say it is, and the people who say it is are mostly people who have large positions in crypto so they don’t quite objective. Bitcoin is the largest cryptocurrency in the world, but it is still very difficult to buy anything with it, and its volatility makes it very difficult to use as a currency. The fee structure for crypto transactions is also incredibly volatile and difficult to predict, making your every move in the crypto world an exciting (and often costly) adventure.

And then there is the influence of climate . Bitcoin is for a limited supply. New bitcoins are “mined” by solving complex equations. All it took was a home computer when the cryptocurrency was launched in 2008 and new coins were being mined fairly quickly. But as more coins are minted, it becomes more difficult to mine new ones – so difficult that Bitcoin now consumes more electricity than some small countries . And its power requirements will only get worse. Not only is this a terrible way to produce anything, the costs in terms of finance and climate impact are becoming increasingly worrisome, undermining faith in the future of cryptocurrencies. Not surprisingly, El Salvador, the only country using bitcoin as legal tender, was considering building a mine atop a volcano .

And finally, many countries are ready to rain on the parade of cryptocurrencies. Russia’s central bank is likely going to ban crypto, China has already banned it, and in the US, the Federal Reserve appears ready to intervene with its own cryptocurrency, but experts disagree on whether this will strengthen the market or kill it entirely . Crypto’s connection to crime (both in terms of the rise of scams that lure naive investors to their doom, and its popularity among criminal gangs who enjoy anonymity) all but guarantees that at some point, governments will start creating—and securing—a lot of rules around them, which does not bode well for their future growth.

Is it worth investing in cryptocurrency?

Cryptocurrency is looking more and more like a huge bubble that will eventually burst, so the main advice as to whether or not to invest in cryptocurrencies is to treat it as a form of gambling – even more so than the stock market. With stocks you are always at risk, but at least there is real, definable information that you can use to make decisions. Yes, you can make a mistake in the price of concentrated orange juice and see your investment melt away, but at least your guess was confirmed. With cryptocurrency, it is simply impossible to predict anything. Zero data. Bitcoin could skyrocket to $100,000 tomorrow or fall to $10,000. Nobody knows. And what’s worse, there’s no way to know.

This means that you should not invest in a cryptocurrency that you cannot afford to lose. Consider the story of Mark Cuban, the billionaire and one of the protagonists of Shark Tank . He’s a guy who regularly tells people what they have to do to be successful in business and finance, but he lost $200,000 trying his hand at a form of crypto investing called “yield farming” where you buy crypto tokens and lend them. back. to the platform to earn interest. As he told the New York Times , “I should have done more homework.”

Bottom line: The cryptocurrency bubble may not burst today or tomorrow, but it is too volatile to risk your rental money.