Recently, the value of cryptocurrencies has come crashing down, and hard. Some altcoins have lost up to 50% of their value. Bitcoin the foremost cryptocurrency has not be left out either. It is now trading below $10,000 from highs of $20,000 a few weeks ago. This leads to the question, are cryptocurrencies in a bubble? To understand whether they are in a bubble, one needs to look at previous bubbles in history.
The Tulip Bubble
The tulip bubble happened in the 1600s in the Netherlands. The bubble formed when people started embracing tulip flowers as a status symbol. This led to an increase in demand, and with it, a gradual increase in the price of tulip flowers. However, as demand grew, prices rose and reached a point where it became a matter of speculation. People started buying tulips hoping that the price would rise even further. This went on until the prices got so high that the prices out-priced even the richest in society. This caused a panic in the market, and the result was a crash in the prices of tulips.
The Dot Com Bubble
This is a 1990s bubble that involved internet stocks. The internet was just coming up and there was a perception that any company that offered products over the internet would outperform the market by a huge margin. The result was that internet startups received extra ordinary valuations even though many of them had nothing tangible to offer. It was clear to those in the know that the valuations had no correlation to the fundamentals of most of those companies. The result was panic selling, which saw many of these companies collapse as they ran out of capital. Only companies that had solid technological innovations survived, and became the tech behemoths that we know today.
How does the crypto market fit in these two bubbles?
A critical look at the two bubbles reveals a canny resemblance to cryptocurrencies. How is this? Well, like the tulip and the dot com bubbles, there is an underlying reason for the initial market rise. In the case of the crypto market, it is the revolutionary blockchain technology. There is consensus that this technology will change many facets of life, including finance. However, out of this initial wave, there has been a rise of all manner of cryptocurrencies, riding the blockchain wave. We now have coins that have no real world use having billion dollar valuations.
A good example of this is dogecoin. The coin has risen so much that even the founder can’t understand why a coin that has had no software updates in close to two years has a valuation of $2 billion. It is at this point that the market has become so overheated that smart money no longer sees cryptos as a viable investment. The result is that the market is now collapsing, just like the tulip and the dot com markets before it. There is a good chance that only coins with solid fundamentals will survive the current bloodbath.