The Five Stages of a Market Bubble (and Where the Cryptocurrency Is)
Depending on who you ask, blockchain technology is either a revolutionary and breakthrough development or a nonsensical marketing term that represents a bloated concept. Whatever you think about the underlying technology, you cannot deny that blockchain-based assets such as cryptocurrencies and, more recently, non-fungible tokens (NFTs) have exploded. At one point, one bitcoin was worth over $68,000 and NFTs were selling for millions of dollars.
But cryptocurrency prices are the very definition of volatility; At the beginning of 2022, the value of bitcoin fell below $35,000, and this was not the first such crash in the cryptocurrency market. This volatility has sparked a healthy dose of skepticism because it makes it impossible to view bitcoin and other cryptocurrencies as useful for anything other than speculation. Part of the appeal of bitcoin was that, unlike fiat money, it was hard-limited—there would be a limited number of bitcoins in the world. But crypto coins can be forked into new versions, and it’s incredibly easy to invent a new crypto coin out of thin air. There are currently over 10,000 cryptocurrencies.
All this worries many that the cryptocurrency is in a classic bubble. Past bubbles – the housing bubble, the dot-com bubble – have shown us that the only certain thing about a bubble is that it will burst. But economic bubbles go through some pretty clear stages if you know where to look, which means we can at least make a reasonably educated guess about where we are with crypto and where we’re going.
What is a bubble?
An economic bubble is a simple concept: it occurs when the price of something no longer matches its actual value. As early as the 1600s, the tulip bulb market in the Dutch Republic went wild , with individual tulip bulbs selling for many times the average person’s annual income. Prices went up and up, people frantically bought their way through so they wouldn’t miss out, and then the bubble burst, prices crashed, and a lot of people went bust.
There are different kinds of bubbles for different things like stocks or houses. A cryptocurrency bubble would be a form of asset bubble. But no matter what a bubble is based on, an economic bubble goes through roughly five stages:
- Bias. It can also be seen as “destruction”. This is when a new concept or product catches the attention of investors. Blockchain and cryptocurrencies are exciting new developments, and when Bitcoin was first released in 2009, it was a truly innovative concept that caught the eye.
- Boom. After a period of slow growth, the price begins to rise rapidly as information spreads. Instead of a small number of savvy investors, the product becomes mainstream and gets a lot of media coverage. People are rushing to invest in this hot new investment, causing prices to rise even more.
- Euphoria. Prices are reaching ridiculously high levels, but no one seems to care because there are an infinite number of “big fools” willing to shell out to buy.
- Receiving a profit. Some investors are unhappy with the valuation and begin to nervously look for exits. As soon as they start selling or reducing their positions to compensate for the risk, others follow suit.
- Panic. Everyone notices the whales cashing in and the race to the bottom begins. Prices are falling and as they fall people are more and more desperate to cash out before they lose everything.
Crypto Bubble or Shake-Up?
The description of a financial bubble is probably familiar to anyone interested in cryptography. Defenders argue that cryptocurrencies go through frequent shake-ups that reduce value and then recover it, often exceeding previous valuations. Economist Tyler Cowan argues that the market is glutted with crypto assets, most of which will disappear once the hype subsides, but core assets like Bitcoin are here to stay. History bears this out: the dot-com bubble didn’t wipe out tech companies or the internet, and just because so many social media platforms have crashed doesn’t mean social media doesn’t exist anymore.
But just because crypto and blockchain-based assets are there to stay doesn’t mean they aren’t in a bubble right now. It is clear that the value of many cryptocurrencies has been wildly – wildly – inflated, considering how relatively worthless they are as a currency or store of value (hell, the Shiba Inu crypto coin, which literally started out as a joke, was valued at $30 billion). end of last year). In addition, the NFT market is clearly supported by transaction laundering , where people buy their own NFTs to create an illusion of value.
The recent collapse in the value of the cryptocurrency and the lack of a quick recovery indicate that we are in the fourth stage and profit taking has begun . But there’s one reason to think the crypto bubble won’t escalate into a full-blown panic: it could be saved by the cult atmosphere surrounding bitcoin and other cryptocurrencies. The hold on dear life (HODL) and buy the dip crowd believe that these boom and bust cycles are natural and nothing to fear, and their insistence on holding on to and rallying around crypto could avoid a total failure. panic.
No one can say with certainty that the crypto bubble is about to burst. Whether or not you have the guts to find out depends entirely on your personal level of risk tolerance and ability to deal with the fact that cryptocurrencies can wreak havoc on your mental and emotional health .