With prices of cryptocurrencies plummeting to their all-time lows, so many institutional and retail traders are beginning to wonder what the future of cryptocurrency would be, like Crypto Bubble. Investors still holding on to their crypto portfolio.
If they may begin to worry about losing money, particularly when they smell a crypto bubble. For new investors, most of them are curious to know the right time to invest their hard-earned money to recoup a decent return on their investment.
As a cryptocurrency enthusiast, it is important to understand the dynamics and functionality of the global cryptocurrency market and how crypto bubbles work; otherwise, you may lose your money to market forces.
In this article, we will explain what a cryptocurrency bubble means, how to identify one, and also explain whether or not we are currently experiencing a crypto bubble, considering the bearish nature of the global cryptocurrency market.
What Is a Crypto Bubble?
Simply put, a cryptocurrency bubble can be best described as a situation when a digital currency or asset is priced way above its current value. Generally, the value of an asset or investment is determined based on a wide range of factors, including its growth potential, earnings, demand, and much more.The value of some assets can even increase more than its projected value, in some cases.
According to experts, there are some circumstances that may make a crypto bubble to form, including: More people joining the bandwagon to invest in a particular asset will make the asset price increase more than its intrinsic value. Assets prices can surge further when people notice the price appreciation and continue pumping in their money. Massive adoption or excitement over an asset may lead to price increment.
However, it is important to point out very clearly at this point that not every price increment of an asset refers to a crypto bubble. For instance, an asset can experience a price increment during its recovery phase, especially after a recession. The difference between a crypto bubble and a traditional price appreciation is that the cause of the latter is Justifiable.
How Crypto Bubbles Work
Crypto bubbles form in a similar manner in any market. Here is how it forms: First, it begins with an event that causes cryptocurrency investors or traders to shift their attention to a particular asset. Generally, the introduction of Bitcoin in 2009 was a big catalyst that made investors shift their attention to the cryptocurrency space; thus, opening up more investment opportunities.
Next, investors that are curious and want to join the bandwagon will begin to pay attention to the gains and benefits that the new assets bring to the table. Speculators, on the other hand, will begin to map out their strategies on how the assets will change their investment portfolio narratives.
These actions and activities will further increase the price of the assets and attract even more investors to join the bandwagon. Let us use Bitcoin to explain this phase very well. Bitcoin experienced a bubble between 2017 and 2019. During this period, more investors pumped in their resources to have BTC in their portfolios.
Finally, some investors that didn’t get their art right will definitely lose money, triggering massive sale of the assets. That may eventually lead to a situation known as the “snowball effect.”
Investors that bought into the asset early will leave with a lot of gain, but those who came in late will eventually lose a significant portion of their assets to market forces. The price of the asset will then plummet below its launching price.]
How To Recognize Bubbles
Whenever a crypto bubble occurs, experts have proffer a way for crypto investors to recognise the bubble. The best way you can identify a crypto bubble is to understand the illustration we explained above.
Identifying bubbles in a traditional market is more simple than recognizing one in the cryptocurrency space. Despite the illustration above, there are some investors that will never spot a bubble until it popped.
In traditional investments like stocks, bonds, and the likes, one can easily recognize a bubble when the asset prices go up more than their actual value. One can also study a company’s financials and business performance to recognize a bubble.
However, the process is entirely different with the cryptocurrency space. As far as cryptocurrencies are concerned, examining investors’ mentality is one way to recognize a crypto bubble. For instance, investors may be excited about a new opportunity if a price increment occurs immediately a social media post goes viral.
Are We in a Crypto Bubble?
It can be very difficult to assess whether we are currently in a crypto bubble or not. Asset price increment can mean different things to different investors. Some assets can simply just be overvalued, others may experience price appreciation due to excitement. So, really, it’s difficult to determine whether we are in a crypto bubble.
For traditional investments, you can assess their values based on things like their financial projections and business performance. As for cryptocurrencies, the yardstick to measure its performance or value are competition, cost of production, and demand. Bitcoin (BTC) has experienced a number of bubbles since it was launched way back in 2009 by Satoshi Nakamoto.
In 2017 December, BTC price grew to $13,000 before popping. BTC price skyrocketed from $3,400 to a whopping $12,000 in 2019. After several dips, the price of BTC shot up to around $61,000 in October 2021. As of the time of writing this post, BTC traded for $19,919.02 USD. The fluctuating nature of BTC may not be unconnected to investors’ mentality and speculation.
Determining when a crypto bubble is building up can be difficult for beginners and the average crypto investors. Professional investors can have a different perspective by understanding the illustration that we have outlined in this article. Beginners may be uncertain as to the future of the crypto market and how the market will pan out in the coming days.
When drafting your trading strategies, it’s important to consider your investing skills, knowledge of the market, and your budget. It’s also important to consider the reason why you want to invest in an asset. Do you want to invest just to join the crowd? Do you want to invest because you believe in the assets? Clearly defining your reason for investing will keep you on top of your game.