Cryptocurrency – Is it a bubble?

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What is a bubble 

To first understand the entirety of this article, we would need to know what an economic bubble is. A simple search on Google will provide us with multiple results. Forbes – a well-known and reputable source of information in the financial world describes it as –

A bubble is a run-up in the price of an asset that is not justified by the fundamental supply and demand factors for the asset. Bubbles can occur in any traded commodity or financial instrument.

Forbes

Investopedia, another leading financial news site describes it as – 

“A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a “crash” or a “bubble burst.”

Typically, a bubble is created by a surge in asset prices that is driven by exuberant market behavior. During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value.”

Stages of a bubble

Before we breakdown into the nooks and crannies – of whether cryptocurrencies as a whole is one giant bubble waiting to crash or a fear unfounded, Hegion will benchmark pointers against the stages of a bubble that is widely accepted (as covered on Investopedia). Here are the five (5) usual stages of a bubble. 

  • Displacement 
  • Boom in popularity 
  • Euphoria and excitement 
  • Profit & Golden-period
  • Mass hysterical 

With these pointers as the benchmark pointers, we will look into facts and conclude if cryptocurrency is a bubble waiting to happen or a victim of unfounded fears.

Displacement stage – Does Cryptocurrency fit this criteria?

As extracted from Investopedia – This stage takes place when investors start to notice a new paradigm, for example a new product or technology. In this case – Bitcoin (cryptocurrency). Yes it went through a similar bull-run on a smaller scale in 2013. Many skeptics and so-called “analysts” predicted it would burst within a matter of time. However, we know that this claim was unfounded (so far) as the bitcoin bull-run and search happened on multiple occasions. 

While the timeline and data is too premature to conclude anything solid, a considerable amount of time has passed to define it as a “hit-&-run” product. 

Verdict – while inconclusive, it can be said that it passed through this stage 

Boom in popularity and prices

Prices will continue to rise and gain momentum as more investors enter the market. As more people start to buy for fear of missing out, the cryptocurrency starts to see a boom in their popularity and prices. Cryptocurrency has certainly experienced extreme spikes due to its volatility. 

Verdict – No doubt 

Euphoria and excitement 

As cryptocurrencies continue to hit record prices, euphoria will kick in. This would cause investors to throw caution and for some, logic, out the window. Euphoria can and will always happen at any point of time for someone for anything. The stock market is one example where extreme euphoria has happened frequently since the formation of it. 

Verdict – Inconclusive. Data and results are too vague to determine

Profit & Golden-period

Anyone who can identify the early warning signs will make money by selling off their cryptocurrencies. Mass market majority would cash out a portion or whole of their profit. This would shift the position seismically, which may give rise to an unwanted domino effect. 

However, the cryptocurrency market has seen and been through many of such occurrences with no extreme results. Barring scam coins and projects. 

Verdict – Too long a period and frequent occurrences. Inconclusive 

Mass hysterical 

Asset prices change course and drop (sometimes as rapidly as they rose). Investors want to liquidate them at any price. Asset prices decline as supply outshines demand. It has happened before, is happening and will continue to happen. Time frequency of this stage also means that mass hysterical is highly unlikely to burst a bubble

Verdict – Unlikely 

Conclusion

We are not able to speak for you nor do we give any guarantees. From the economic and psychological (human behaviour pattern) stand point of view, cryptocurrencies has weathered through many storms – such as skepticism, government intervention, scams, etc – and yet, it is still standing tall. At Hegion.com, although we cannot tell you if it is a bubble, we can chime in with a statement of factors – 

The proponents and opponents of cryptocurrencies, the unique nature of blockchain and slow adoption rate of the blockchain technology is keeping the dream of the cryptocurrency alive. It could very well be a bubble, it could very well be a bubble that may be encrusted in for a long time to come – long enough. 

What do you think? Write to us - agree or disagree, we welcome all. 

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