‘The Crypto Bubble’ might sound like a fantasy novel title or a new nanomaterial, but it’s a question many are asking of the rapid rise in the cryptocurrency market in recent years.
Often a rapid growth rate in any investment market leads to an overshoot in value and a harsh readjustment – so can we expect to see the crypto bubble burst in the coming months and years?
Perhaps surprisingly, some market commentators do not believe cryptocurrencies represent an investment bubble, despite indications that some of the main markets have begun to lose significant value.
In a Global Coin Report article published in November 2018, cryptocurrency trading specialists iBankCrypto argued that a typical market cycle occurs in four phases:
- Stealth: A new opportunity hits the market but as yet, little is known about it.
- Awareness: More investors begin to recognise the opportunity and buy into it.
- Mania: Media coverage and mass market investment drive the value to a peak.
- Blowoff: Value drops to a low then eventually bounces back to an average.
The article claims: “It becomes priced at the average value it had all over the journey, and it stays there until some new development starts the whole circus once again. One of the most basic rules in technical analysis is this: sooner or later every market will go back to its average price.”
Despite the cryptocurrency market having crashed substantially in the previous months, the article argued that this is typical – and therefore not a bubble, but a perfectly normal pattern.
When did the crypto bubble burst?
The iBankCrypto article came just weeks after the Financial Times ran a piece called What next after cryptocurrency bubble bursts?
In the August 2018 column, the FT reported a slump in the value of Bitcoin – “the original and most valuable crypto” – from $19,000 to between $6,000 and $8,000.
Meanwhile the cryptocurrency market as a whole had fallen from over $800 billion to just a quarter of that value, according to CoinMarketCap data cited in the FT article.
“Advocates see Bitcoin, which unlike fiat currencies is not controlled by a central authority, as a store of value,” the article explained. “But its short history has been marked by rapid rallies and sharp drops.”
Interestingly, the FT found that investors – including amateurs – were still either positive about the prospects of Bitcoin, or simply too stubborn to sell at a lower price.
Cryptocurrencies were not the only speculative bet to lose value in 2018, as the FT also cited data showing double-digit drops in the value of lira, copper and gold, plus single-figure falls in the FTSE100 and the pound.
What happens next?
One possibility is that it is the number of cryptocurrencies – and not the value of the market – that became over-inflated during the so-called ‘Mania’ phase of the cycle.
With both amateur and professional investors worldwide looking to put funds into cryptocurrencies, more and more of the digital token-based platforms started to spring up, and many of these quickly passed $1 billion market value.
By the time of the FT article, CoinMarketCap listed just 15 cryptos with a value in excess of $1 billion, while entire websites had been created solely to list abandoned cryptocurrencies under the moniker of ‘dead coins’.
Concern continues about the use of cryptocurrencies to evade some of the restrictions and regulations that are applied to physical currencies, such as using cryptos for money laundering and organised crime, although it is unclear to what extent any such activity is actually taking place.
Governments are responding to this by looking into ways to tax and regulate funds held in crypto accounts, which may eventually spell the end of the anonymity such platforms have historically offered to accountholders.
Until the necessary laws are passed to crack down on cryptocurrencies, interest in the main players – especially headline-grabbing Bitcoin – remains relatively strong, and ultimately it could be that these big-name cryptos come through the crisis while for the rest of the market, the crypto bubble bursts.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.