The rapid rise in the price of cryptocurrencies over the past few years, especially at the turn of the year 2017/2018, is associated with a ‘bubble formation’ term.
The Dutch tulip bubble in the 17th century, the dot-com bubble at the turn of the millennium, or a quote from Jamie Dimon, the CEO of JPMorgan, that Bitcoin is a ‘fraud’ are cited as symbolic references. Just keep reading to find out what crypto bubble is. Let’s get started!
What is Cryptocurrency Bubble?
What does a speculative bubble really mean and does this apply to cryptocurrencies?
In terms of science and macroeconomy, a speculative bubble describes a market situation in which a good gains in value in a very short time without any fundamental change in its property. Such strong growth is often associated with very high volatility.
The price development of a crypto market reflects the definition of a bubble. However, a clear distinction should be made here. It’s all about some coins such as Bitcoin, Ethereum, or other altcoins that have a lower market cap and can be found on CoinMarketCap beyond the top 50 cryptocurrencies.
Especially smaller coins, with a low trading volume, showed an exponentially growing price increase. Even despite the fact that the projects had met with little success. Pump & Dump strategies have been used by investors, as there was a lot of hype around them. That is, large positions have been sold by initiators.
What About ICOs?
ICOs, very new crypto projects that collected an incredible amount of money in 2017 and 2018, are often associated with the formation of bubbles. In many cases, this is justified, as a fundamental value was low and didn’t move in proportion to a price increase.
The main cryptocurrencies such as Bitcoin have an intrinsic value. The price increase of Bitcoin wasn’t as sharp as that of many altcoins, nor was the volatility. Bitcoin is also used and applied, for example as a ‘store-of-value’, just like gold. Bitcoins are also used for numerous transactions to transfer money from A to B at a low cost.
Are Cryptocurrencies Also Used?
Today, many cryptocurrencies have no immediate use and are based on pilot projects, proofs-of-concept, and potential use cases. Every large company in the world is concerned with the underlying blockchain technology. The implementation in technical designs of finance, technology, and logistics companies is only a matter of time.
These potential use cases are already assessed by investors, just as every business plan in the free market economy uses discounted earnings. Due to novelty of the technology, scenarios for those plans are extremely broadly spread. That’s why incorrect evaluations, hype, and subsequent FOMO (fear of missing out) can arise in a very short time.
Ultimately, a crypto market is a free market, where supply and demand determine a price. Any new market has seen a supposed bubble formation which is extremely important in attracting attention and capital. That is, the use cases of a blockchain improve our lives significantly.
Do you consider cryptocurrency as a bubble? Just share your opinion in the comments!
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