It Popped, As Predicted – The Woes of the Cryptocurrency Bubble

bitcoin bubble pop

While bearish cryptocurrency experts fear that the bitcoin and other cryptocurrencies are caught up in a speculative bubble: the bitcoin was valued at $19,511 in December 2017, $8,000 at the end of July 2018, and $6,500 in August. The bullish experts see this is as Bitcoin’s way of gaining its footing in the market, the same way Microsoft and Intel, the early internet companies did.

But, how true are these sentiments? Are we in a cryptocurrency bubble? If so, is the bubble about the pop?

In economic terms, a bubble refers to a situation where an asset’s price exceeds (by far) its intrinsic value. The early 2000s recorded the dotcom bubble where several companies saw their share prices soar, only because they were in a dotcom industry, but there was no reference to a likelihood for chances or profits. The cryptocurrency bubble is, therefore, likened to this bubble. And in 2017 alone, the value of the bitcoin rose by 900 percent with no obvious reason or based.

 

The bubble burst – Some predictions come true

Nouriel Roubini, a professor of economics at the New York University and the guy who predicted the 2008 global financial crisis notes that the Bitcoin is a representation of “The Mother of all bubbles.”

There’s also a research team at (BAML), Bank of America-Merrill Lynch who argued that the bitcoin is among the biggest asset price bubbles recorded in history.

And along with several other top economists, he dismissed cryptocurrencies. So, is he (and his cronies) correct?

Unfortunately, this prediction came true. In January 2018 as reported by the Financial Times, the cryptocurrencies total market capitalization climbed from $18bn a year to $800bn from data provided by CoinMarketCap.  And by August, the bitcoin had lost 75 percent of its value as it stood at $200bn.

This huge drop in Bitcoin’s market value has been reporter alongside the rise in the volatility of the mainstream financial markets like equities which are giving traders profitable opportunities against the fluctuating prices of assets.

While seen as the most valuable (it’s the original cryptocurrency), bitcoin plummeting value from $19000 at the end of December 2017 to $6000-$8000 mid-2018, its advocates still see it as a store of value. Many traders, especially the ones who bought bitcoins at the end of 2017 lost a lot of money.

To make sense of the burst, CNBC highlighted how much you’d have lost if you invested $1,000 in any of the top coins:

An investment of $1,000 in Bitcoin means you’d have lost $650 if you invested in December 2017, $836 if you invested in Ether, $858 for investments with Bitcoin Cash, $833 with litecoin, and a huge loss of $920 had you invested in XRP. XRP, the biggest loser appears to have lost over 92 percent of its value since January. These numbers are based on the fact that Bitcoin had lost 65 percent of its value by September 2018.

 

Making sense of what happened

The surge in demand for the bitcoin which inflated the cryptocurrency bubble, causing an increase in demand for Bitcoin in future markets. Keep in mind that nearly all of the other cryptocurrencies are directly tied to the price of and the faith people have in Bitcoin. So when Bitcoin drops, the other cryptocoins drop as well. This is an important aspect of the total market.

Brief History

  • December 17, 2017 – the Bitcoin reached its all-time high of $19,783.06
  • December 22, 2017 – Price of Bitcoin plunges to below $11,000 – a 45 percent drop in price
  • January 12, 2018 – further 12 percent depreciation of price following rumors of possible ban on crypto trading
  • February 6, 2018 – price halved at $6,000
  • November 15,2018 – Further drop of $5,500 with market capitalization falling below $100 billion.

 

What the Future of Cryptocurrencies, after the crash?

Looking back at history, crashes have seen asset prices drop by 80 to even 100 percent. But after such catastrophic crashes, history suggests periods of slow-price recovery or even stagnation, coupled with government regulation and asset consolidation.

Acting along these lines is a cryptocurrency exchange based in San Francisco which is in talks with the US’s SEC about being a registered regulated brokerage firm/ trading platform.

And with the center of cryptocurrency markets based in Asia, a continent known for adoption, as well as the investment in the digital currencies, regulation is expected to hit fast in Japan, as well as South Korea.

2018-19 is seen as a regulation period. There is and will be a threat of government regulation or actual government regulation.

Unfortunately, this has a negative effect on the prices of cryptocurrencies as seen from the government crackdowns in China between 2017 and early 2018. The involvement of the government resulted in the banning of Initial Coin Offerings and cryptotrading, as well as the closure of exchange and denial of social media access to market participants.

Despite the government’s efforts, the leading crypto exchanges in China, Huobi, and OKEX moved their operations to Hong Kong.

Other than the Chinese government, governments like the UK, South Korea, the US, and even the EU are trying to enforce regulations – to protect investors.

Dubai, Sweden, and Uzbekistan are receptive of electronic money and Bitcoin economies.

What these mean is that despite the challenges faced, cryptocurrencies will see to see another day, and run the economy.

Several activities are underway to encourage the development of a financial standard or common cryptocurrency taxonomy for the treatment of the digital assets.

 

The bottom line

Back to the example of the dotcom bubble and the boom, now comes the boom, according to the experts. A rapid evolutionary wave is not expected as the market matures and more serious players emerge, scale, and take over. This was always inevitable, and a correction is sorely needed to clean up the market as a whole.

It’s also important to note that from the current cryptocurrency bubble burst, a big percentage of the current cryptocurrencies will be gone in the next few years. There are over 1,500 cryptocurrencies today. Could this be a positive evolution, separating the best tech from the nifty ideas? I think that an evolution and balance is a good thing in the long run. Be safe, and invest smart cryptocoin enthusiasts!