Bitcoin bubble: What does it mean and when does the bubble burst?
Is cryptocurrencya bubble? That's the question everyone's asking themselves these days. In the past we have seen Bitcoin reach new highs, followed by a rush of new investors buying their first crypto currency.
In this article, we will analyze past bubbles, draw parallels with the crypto-currency market and show our crypto-currency buying strategy.
What is a bubble?
A bubble is a point in a market cycle in which rational investments are lost sight of and replaced by "emotional investments". This type of investment is not determined by actual assets, but 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. When an asset is "hot", the news naturally starts to report more often about the asset, which increases public awareness and enthusiasm, resulting in more people buying the asset, thus increasing demand and ultimately driving up prices. We have seen 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 corrects itself. The price decline is usually caused by denial, fear, surrender and despair. This is known as the "bubble burst". 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 average.
Are Bitcoin and other cryptos a bubble?
In short, we believe that the crypto currency is in a bubble. The reason for this is that price actions for the entire crypto-currency market capitalization seem to be largely driven by emotions. A good example of this is the large movements in crypto currency prices based on rumors. The rumor that Ripple was added to the coinbase in March 2018 led to a price increase of almost 6%.
We do not want to spread fear, uncertainty and doubt in the market. However, our analysis leads us to believe that new technologies and bubbles go hand in hand. One could even say that it is inevitable that new technologies cause bubbles.
What other evidence is there for the crypto-bubble?
There is currently a large gap in the market between crypto prices and the actual technology - here are two examples
- Cardano has no functioning product and has a current market capitalization of 6.5 billion dollars (all-time high of 33 billion dollars).
- EOS has no functioning product and has reached a historic high of $12 billion.
How could anything without a working product ever have been rated so highly? There is no inherent problem for a technology and price gap, provided the project delivers in the future. If block chain technology and crypto-currencies are widespread, those who actually deliver products and solve problems in practice are likely to become the Amazons of tomorrow.
We think that crypto currencies are in a bubble because the difference between price and the underlying technologies and adoption is so great. The price of crypto is not so much determined by fundamentals such as number of users, sales 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 capture in the niche in which it competes.
- The product is introduced as described in the white paper.
- Cryptos will increase prices in the future.
For this reason, we believe that crypto-currency prices are currently being driven out of any accurate or rational reflection of their actual value. Therefore, the crypto currency market is in a bubble. But when you think about a new technology, the value is always based on expectation. No new technology is developed and mass acceptance is achieved immediately. These things take time and the crypto currency is no different.
So what is a reasonable price for crypto currencies?
It is very difficult to determine what a particular crypto currency 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 that:
"Crypto X is amazing and will revolutionize Niche Y, which is a billion dollar market. If Krypto X even reaches Z% market share, it would be worth tens of millions. Today's prices are amazingly affordable, considering that. Get in now and make a lot of money."
Both cryptocurrencieshave to accept that no one knows for sure whether they will be adopted on a larger scale. The value of crypto currencies lies in their ability to provide better solutions to real-world problems. These solutions only become truly valuable when they are used en masse.
In the economy 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 the crypto currency. That's why so many people are trying to motivate people to adopt crypto or Bitcoin. Their entry into crypto simply means that more users will be in a network state, making crypto currencies more valuable.
Anyone who tells you that a crypto currency should be valued at X, has no idea and is just speculating. We think that the most important questions to ask are the following:
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 with time many people will actually use the solution?
4. is there an acceptable entry price for investments at this stage?
It is quite simple: If a crypto currency has no users, it will be worth nothing at some point.
3 Big bubbles of the past and what can they tell us about the future of the crypto currency?
Most readers will probably believe that bubbles are a bad thing. At Bitcoin-News.one we ask for your understanding and see bubbles as a good thing.let us explain and check what happened in historical bubbles.
The British Railway Madness 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, and between 1836 and 1837 there was a small railway madness in which the parliament approved the creation of 59 railroads.
In the 1840s, less regulation and a stronger economy led to the creation of 100 British railway companies in a very short time, with share prices for all these companies rising and the middle class investing heavily in railway projects. This led to the asset bubble known as 'Railway Mania'.
Essei noted that the steam locomotive was not a new technology in the 1840s. People recognised the value of being able to transport people and goods faster and more cheaply than ever before. Investors foresaw the creation of a "new economy" and wanted to invest in it.
Railway investors were right. The railway was indeed the future. But no matter what country you are in, the list of long-standing railway companies is probably very short. The bubble of the railway madness was decisive for the existence of the railways that we see all over the world today. The bubble financed the technical infrastructure (railway lines) and enabled the introduction of mass railways.
The dotcom bubble 1997-2001
A large number of companies were founded within a short period of time. The share prices for the online business increased. Turnover and fundamental data did not play a role. Just being online meant that a company was driving its share price up. Just adding .com to the end of a company's name was enough to see a massive rise in share price. We see this impact on the share price today in companies like Kodak. In January 2018, Kodak announced its intentions:
"To build a digital rights management platform - KODAKOne, which uses block chain technology and continuously searches the Internet to monitor and protect the IP of images registered in the system.
Following the announcement, Kodak's share price rose 250% within two days. This seems to be very similar to the dotcom boom. As with the dotcom boom, many people have been interested in crypto-currency trading and investing in projects with no revenue.
Several investors who invested in companies during the dotcom bubble have probably lost money. But those who invested in the right companies and "HODLn" (i.e., 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 peak of the dotcom bubble. When the bubble burst, it had a stock price of less than $10. Today, Amazon shares trade at $1,545 per share. Those who invested in Amazon even at the peak have still made a 15-fold return on their money if they have HODLn.
This is actually the investment made during the dotcom period, which we have to thank for promoting the modernisation of the technical infrastructure. This includes connecting homes, cities and countries to the Internet. This infrastructure was the basis for our online world today.
Dutch tulip bladder 1634-1637
Maybe 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 in the long run this was probably great for Holland. Holland exports tulips worth around 214 million euros annually. If the tulip madness had not happened, would Holland have become a tulip power station? We would actually argue that the tulip bubble has a great long-term value creation.
Common topics of bubbles
In 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 such expectations is that many are disappointed by 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 block chain projects will change the world in the long run. The fact that many people are now asking whether crypto-currency is in a bubble is actually good news for the technology and a potential mass application if we examine the history of past bubbles.
Would you like more proof that the crypto currency is in a bubble? Well, let's look at the ICO delusion between summer 2017 and the present.
- The number of ICOs has increased dramatically. This is similar to the creation of many Internet and railway companies in a short period of time.
- Most ICOs do not have a functioning product and ICOs are evaluating their companies at ever higher levels. This means that there is an increasing gap between the price of cryptos and the technology. Instead, valuations are determined by expectations for the future, not by fundamentals.
Essei pointed out that we believe that there are many good ICOs and real innovations in the crypto world. We are conditioned to believe: bubble = bad. In fact we think the opposite: Bubble = Good.
Why bubbles are good?
Any new technology or innovation needs funding to become a genuine product and then be widely adopted. People do not work for nothing. The media hype around the bubbles is good because it makes more people aware of the technology. This is important to facilitate mass adoption at a later stage.
An ICO is the one the company actually collects the money that it believes is needed to achieve the full roadmap. Sometimes this is over 5 years in the future or more. Some existing projects are already fully paid for. There is no evil investor who will take care of the financing and then destroy the project. This means that innovation can thrive without funding problems, and we think this is a great thing for the future of crypto-currency projects. The infrastructure that is being built now should serve future crypto-currency projects. What kind of infrastructure does crypto need? The purchase of crypto currency requires an infrastructure. I may need to deposit to 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 platform benefit from the infrastructure already defined by Ethereum.
Remember that bubbles signal good things for the future of the crypto currency.
When should you buy in the crypto-bubble?
If you are thinking about investing in crypto currency, only you can decide whether it is worth taking the risk. However, we personally follow some rules when and how to invest.
- All-time high = no purchases. We never buy crypto currency when it's at an all-time high. This prevents you from being the poor guy who buys Bitcoin for $20,000 and ends up at $6,000 after the panic. We believe that every asset is worth buying at the right price.
- The average calculation of the dollar cost is important. Setting aside and investing a fixed amount each month means that you are expanding your entry point, for example, buying less tokens when the price is high and more when the price is low. This strategy helps to avoid going all-in at really high prices and selling everything when the market collapses.
Do the opposite of what you hear on the news, have you heard Bitcoin is dead? It's probably a good time to buy. You're watching a video on CNBC about how to buy Ripple? Chances are that the market is near its peak and now is a good time to sell or stay out.
In January 2018, CNBC called the tip forRipple. Anyone who followed CNBC's instructions to buy Ripple is now sitting on a huge loss.
Do not buy on the basis of a hypothetical. Is everyone talking about crypto currency or a new coin? Probably the price is inflated and it's not a good time to buy the crypto. Better wait until nobody talks about it anymore and the market slows down.
What do historical bubbles teach us about what to invest in?
Starting from what we have learned from past bubbles, what survives after the bubble bursts? The new infrastructure. That's why we love the investment case for cryptos, which are infrastructure games. Not all of them will be successful, but we are confident that when the bubble bursts there will be very important infrastructure for Kryptos.
Nobody knows whether crypto-currency will have a place in the world in the long run or will create the New Economy, as so many claim. Is crypto-currency a bubble? In our opinion, yes, but we argue that bubbles are indeed necessary for new technologies to flourish. If you're thinking about investing in crypto-currency, just remember that if projects don't deliver and close the gap between price and technology, the price is likely to fall. Only invest what you are prepared to lose.