A cryptocurrency bubble is a prediction of a collapse in the crypto market. These predictions have been made by numerous experts in the finance and economic markets over the years. Bubbles are often driven by unsustainable price increases because people are overly optimistic about an asset. Often, it’s a case of people rushing to avoid missing out on values increasing. However, if and when the bubble bursts, those who haven’t sold are left high and dry with nothing.
One of the first examples of a bubble was the dot-com bubble in the early 2000s. Websites were being created at a rapid pace after the birth of the internet, with a lot of money being pumped into various projects. Once this bubble popped, the space lost around $5 trillion. However, the dot-com bubble was a step above any cryptocurrency bubble we have seen so far.
Hard to spot in advance
One of the main issues with spotting a cryptocurrency bubble is that they aren’t identified until they have burst. This proves difficult for people trying to avoid them.
However, sometimes projects are claimed to be bubbles when they are not. An example of this is the argument of the Apple Shares bubble in 2012, when Apple’s share price was $100. However, seven years later, this ‘bubble’ still hasn’t popped.
Many have speculated about the Bitcoin bubble and how it might have already popped. A member of the European Central Bank stated that Bitcoin is “a load of drivel” and it is on the brink of collapsing.
At the end of 2018, we saw the price of Bitcoin drop to below $3,400, and many believed that this was the cryptocurrency bubble bursting. With traditional markets always being quick to judge the cryptocurrency space as a bubble, it was no surprise the term ‘burst’ was used. However, after prices rallied, this is still yet to be proven.
With cryptocurrency bubbles, people become very optimistic about the market, which makes way for more people to invest in the market and encouraging a bull run. Investors tend to get FOMO (fear of missing out) if they aren’t involved in a cryptocurrency bubble, making the price of certain cryptocurrencies go up. An example of this was the bull run of Bitcoin in 2017 when the price went up to $20,000. This was proof of a bubble and how the prices were backed by the optimism of investors.
Why a cryptocurrency bubble might burst
There are certain factors that will cause a cryptocurrency bubble to burst. A burst might happen when traders and investors start to realise what the basic value of the cryptocurrency actually is. After this realisation, more and more people will drop out or sell their cryptocurrency, causing the value to drop. The bubble can be said to have burst when traders and investors lose faith and optimism in the cryptocurrency, and once prices start to decline, people will panic and sell their crypto, causing a large drop in value.
When the Bitcoin bubble burst in late 2018, the price went from $6,000 to almost $3,000. There are many reasons rumoured for this, including the increased cost of mining Bitcoin, the wave of selling among cryptocurrency entrepreneurs causing FUD, and a rising number of warnings from various banks.
So, is cryptocurrency a bubble? Ask us in about 10 years. It is important to evaluate all aspects before investing into these digital assets, ensuring you do not get caught out in a ‘bubble’ scenario. Analyse your own attitude to risk and figure out what value you will get from the investment and progress accordingly.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.