Bitcoin bubble: what does it mean and when will the bubble burst?
Is cryptocurrency a bubble? That is the question that everyone is probably asking themselves right now. In the past, we've seen Bitcoin hit new highs, followed by a frenzy of new investors buying their first cryptocurrency.
In this article, we'll analyze past bubbles, draw parallels with the cryptocurrency market, and point out our cryptocurrency buying strategy.
What is a bubble
A bubble is a point in a market cycle when rational investments are lost and replaced by "emotional investments". This type of investment is not determined by actual assets, but rather by expectations for the future, fear of missing out and greed.
In the financial markets we see that "investing emotionally" always leads to a herd mentality. Of course, when an asset is "hot," the news starts to cover the asset more frequently, increasing public awareness and enthusiasm. The result is that more and more people are buying the system, increasing demand and ultimately causing prices to rise. We saw this type of behavior peak in Bitcoin in December 2017, leading to an all-time high of $ 20.000 for Bitcoin.
As soon as the euphoria subsides, the price will correct itself. The fall in prices is usually caused by denial, fear, surrender, and despair. This is known as "bubble popping". Market cycles repeat themselves over and over again, so that when a bubble bursts, a new bull run usually begins. This explains the volatility of Bitcoin over the years.
Looking at the price data from the coin market cap, it seems that we have returned to the mean.
Are Bitcoin and Other Cryptos a Bubble?
In short, we believe that the cryptocurrency is in a bubble. The reason for this is that price promotions for the entire cryptocurrency market capitalization seem to be largely driven by emotion. A good example of this is the big moves in cryptocurrency prices based on rumors. Rumors that Ripple was added to Coinbase in March 2018 resulted in a price increase of almost 6%.
We don't want to spread fear, uncertainty and doubt in the market. However, our analysis leads us to believe that new technology and bubbles go hand in hand. It can even be said that it is inevitable that new technologies will cause bubbles.
What other evidence is there for the crypto bubble?
There is a huge gap in the market right now between crypto prices and actual technology - here are two examples:
· Cardano has no working product and has a current market cap of $ 6,5 billion (all-time high of $ 33 billion).
· EOS has no working product and hit an all-time high of $ 12 billion.
How can something without a working product have ever been rated so highly? It is due to the expectation of future results. There is no inherent problem for a technology and price gap provided the project delivers in the future. When blockchain technology and cryptocurrency become widespread, those who actually deliver products and solve real-world problems are likely to become the Amazons of tomorrow.
We think cryptocurrencies are in a bubble because the difference between price and the underlying technologies and adoption is so big. The price of crypto isn't so much driven by fundamentals as number of users, revenue, and work products. Instead, the main driver of crypto valuations is expectation:
· The value and acceptance that new partnerships can create.
The market share that the project can take in the niche in which it is competing.
The product will be launched as described in the white paper.
· Cryptos will increase prices in the future.
For this reason, we believe that the prices of cryptocurrencies are currently being driven beyond any precise or rational reflection of their true value. Hence, the cryptocurrency market is in a bubble. But when you think about a new technology, the value is always based on expectation. No new technology will be developed that will immediately achieve mass adoption. These things take time and cryptocurrency is no different.
So what is a reasonable price for cryptocurrencies?
It is very difficult to determine what a particular cryptocurrency is actually worth. Many crypto projects have no working product and only a promise to deliver in the future. We're sure you've heard people say something like this:
“Crypto X is amazing and is going to revolutionize Niche Y, which is a billion dollar market. If Krypto X even achieved a market share of Z%, then it would be worth several millions. Today's prices are amazingly cheap when you consider that. Get on board now to earn a lot of money. "
With cryptocurrency we have to accept that no one knows for sure whether it will be adopted on a large scale. The value of cryptocurrencies lies in their ability to offer better solutions to real problems. These solutions only become really valuable when they are used on a massive scale.
In business we call this a network effect. For example: if there is a person on Facebook, they have essentially no value. When 2 billion people use Facebook, the FB network becomes extremely valuable, as does cryptocurrency. That is why so many people try to motivate them to adapt crypto or bitcoin. Getting started with crypto simply means that there are more users on a network, which makes cryptocurrencies better valued.
Anyone who tells you that a cryptocurrency should be valued at X has frankly no idea and is just speculating. We think the most important questions to ask are:
1. Does the project you are interested in solve a real problem?
2. Is the solution better than what already exists?
3. Do you think that in time, many people will actually use the solution?
4. Is there an acceptable entry price for investments at this point in time?
It's very simple: if a cryptocurrency has no users, at some point it will no longer be worth anything.
3 big bubbles of the past and what can they tell us about the future of cryptocurrency?
Most readers will likely believe that bubbles are a bad thing. At Bitcoin-News.one, we ask for your understanding and see bubbles as a good thing, let's explain and review what happened in historical bubbles.
The British railroad craze of the 1840s
The first steam locomotive was put into service in 1804. In the early days of railroad construction, any new project required parliamentary approval to proceed. Between 1836 and 1837 there was a little railroad craze with parliament approving the creation of 59 railroads.
In the 1840s, less regulation and a stronger economy resulted in the creation of 100 UK railroad companies in a very short space of time. The share prices for all of these companies soared and the middle class invested heavily in railroad projects. This led to the asset bubble known as 'Railway Mania'.
It should be noted that the steam locomotive was not a new technology in the 1840s. People recognized the value of being able to move people and goods faster and more cheaply than ever before. Investors foresaw the creation of a "new economy" and wanted to invest in it.
Railroad investors were right. The railroad was indeed the future. But no matter what country you are in, the list of longstanding railroad companies is most likely very short. The railroad craze bubble was crucial to the existence of the railways we see around the world today. The bubble financed the technical infrastructure (railway lines) and enabled the introduction of the mass railway.
The dotcom bubble 1997-2001
A large number of companies were founded in a short period of time. The online business stock prices soared. Sales and fundamentals did not matter. Just being online meant that a company drove its share price higher. Just adding .com to the end of a company's name was enough to see its share price surge. We are seeing this impact on stock prices today at companies like Kodak. In January 2018, Kodak announced its intention:
"To build a platform for managing digital rights - KODAKOne that uses blockchain technology and continuously scans the Internet to monitor and protect the IP of the images registered in the system."
After the announcement, Kodak's share price rose 250% in two days. This seems very similar to the dot-com boom. As with the dotcom boom, many people have taken an interest in cryptocurrency trading and investing in projects with no income.
Quite a few investors who invested in companies during the dot-com bubble have likely lost money. But those who invested in the right companies and “HODLs” (that is, did not sell their shares, but kept them) did very well. Amazon was founded in 1994 and had a share price of over $ 100 at the height of the dotcom bubble. After the bubble burst, it had a share price of less than $ 10. Today Amazon stock trades at $ 1.545 per share. Those who have invested in Amazon even at the top have still made a 15x return on their money if they HODL it to this day.
It is actually the investments that were made in the dot-com period, which we must thank for promoting the modernization of the technical infrastructure. This also includes the connection of houses, cities and countries to the Internet. This infrastructure was the basis for our online world today.
Dutch tulip bubble 1634-1637
Perhaps this is one of the craziest bubbles in history. In this madness, a tulip bulb reached the price of a house. What people don't talk about is that this has probably been great for Holland in the long run. Holland exports tulips worth around 214 million euros annually. If the tulip craze hadn't happened, would Holland have become a tulip power station? Indeed, we would argue that the tulip bubble has created great long-term value.
Common subjects of bubbles
With every bubble, investors keep saying things like "new economy" and "this technology will change everything". Most of the time, this claim is actually true and the masses have predicted the future. The problem with expectations like this is that many are disappointed with how long it actually takes for the new technology to become widespread.
With cryptocurrency, we think there is a bubble, but we also believe that blockchain projects will change the world in the long run. The fact that many people are now asking the question of whether cryptocurrency is in a bubble is actually good news for technology and eventual mass adoption as we examine the history of past bubbles.
Would you like more evidence that the cryptocurrency is in a bubble? Well, let's look at the ICO craze between summer 2017 and the present.
The number of ICOs has increased dramatically. This is similar to setting up many Internet and railroad companies in a short time.
Most ICOs have no working product and the ICOs are evaluating their companies at higher and higher levels. This means that there is an increasing gap between the price of the cryptos and the technology. Instead, valuations are determined by future expectations rather than fundamentals.
It should be noted that we believe there are many good ICOs and real innovations in the crypto world. We are conditioned to believe: Bladder = bad. In fact, we think the opposite: Bubble = good.
Why are bubbles good?
Every new technology or innovation needs resources to become a real product and then to be widely accepted. People don't work for free. The media hype surrounding the bubbles is good as it makes more people aware of the technology. This is important to facilitate mass adoption at a later date.
In an ICO, the company is actually collecting the money it believes will be needed to hit the full roadmap. Sometimes this is over 5 years in the future or longer. Existing projects are already fully paid for. There is no evil investor who takes care of the financing and then destroys the project. That means innovation can thrive without funding problems, and we think this is a great thing for the future of cryptocurrency projects. The infrastructure now built should serve future cryptocurrency projects. What kind of infrastructure does crypto need? The purchase of cryptocurrencies requires an infrastructure. I may have to deposit on Coinbase and transfer my Bitcoin to Binance to purchase a popular coin. Coinbase and Binance are a kind of infrastructure for the crypto world. Another example would be a developer platform like Ethereum. The decentralized applications based on this benefit from the infrastructure already established by Ethereum.
Remember that bubbles signal good things for the future of cryptocurrency.
When should you buy in the crypto bubble?
When you think about investing in cryptocurrency, only you can decide whether it is worth taking the risk. However, we personally follow some rules about when and how to invest.
· All time high = no buying. We never buy cryptocurrencies when they are at an all time high. This prevents you from being the poor guy who buys bitcoin for $ 20.000 and lands at $ 6.000 after the panic. We are convinced that every asset is worth buying at the right price.
· Averaging the dollar cost is important. Setting aside a fixed amount each month and investing means expanding your entry point, e.g. buying fewer tokens when the price is high and more when the price is low. This strategy helps avoid going all-in at really high prices and trying to sell everything when the market collapses.
Do the opposite of what you hear on the news.Have you heard that bitcoin is dead? Probably a good time to shop. You are watching a video on CNBC about How to Buy Ripple? Chances are the market is near the top and now is a good time to sell or stay out.
In January 2018, CNBC named the top for Ripple. Anyone who followed CNBC's guide to buying Ripple is now at a huge loss.
Don't buy because of a hype. Is everyone talking about cryptocurrency or a new coin? Probably the price is inflated and it is not a good time to buy the crypto. Better wait until nobody talks about it and the market subsides.
What do historical bubbles teach us about what to invest in?
Based on what we have learned from past bubbles, what survives after the bubble burst? The new infrastructure. That's why we love the investment case for cryptos, which are infrastructure games. Not all of them will succeed, but we are confident that once the bubble bursts, very important infrastructure for cryptos will exist.
Nobody knows whether cryptocurrency will have a place in the world in the long term or whether it will create the new economy, as so many claim. Is cryptocurrency a bubble? In our opinion, yes, but we argue that bubbles are actually necessary for new technology to thrive. When you are thinking about investing in cryptocurrency just keep in mind that if projects don't deliver and bridge the gap between price and technology, then the price will very likely go down. Invest only what you are willing to lose.