Is crypto a bubble? We’ve all heard the FUD (Fear, Uncertainty and Doubt) reported by various articles over the years telling us that crypto is one big bubble, a huge crash waiting to happen. Could this be accurate? 

Let’s explore the topic of crypto bubbles while trying to demystify some of the misconceptions about cryptocurrency in 2022 and its associated technologies.

It is worth noting that this content should be considered financial advice. We have been working in the IT and technology sector for over 30 years. During that time, we have developed insight into the crypto space that we feel others will find useful.

What is a bubble? 

A ‘bubble’ is defined as the period of increased market value of an asset. Typically, after a sustained period, these assets quickly tumble in value leading to what some refer to as the ‘bubble’ bursting. se. 

What is an economic bubble?

Technically speaking, all bubbles in the context of this article are ‘economic bubbles’.

An economic bubble is defined as when an asset has large inflation in price that is way higher than the fundamental or intrinsic value of the said asset. These bubbles can be caused by over-hyped and over-optimistic forecasts which investors subsequently want a piece of.

These bubbles can be found in many different sectors and have been known to cause huge damage to economies as well as industries. For example, Japan suffered from what is referred to as ‘The Lost Decade’ after the bursting of the equity and real estate bubbles in the early 90s which left an impact lasting until the early 2000s. Consequently, equity and land values dropped dramatically with land values dropping as much as 70% by 2001. 

There have been lots of economic bubbles throughout history, some of which we will cover in more detail below. Although the notion of a bubble sounds like it could apply to crypto, in much the same way as the dot-com bubble collapsed, that may not necessarily be the case. 

Is crypto a bubble?

Firstly, it is important to understand that cryptocurrency and associated technologies are in their infancy. There is no real way to know where things are heading, and whether or not crypto is a giant bubble. With that being said, here’s our opinion.

You could certainly draw some parallels between the current state of the speculative crypto market to that of the dot-com bubble of the late 90s in terms of capital being pumped into projects that are yet to have a tangible product or service in some cases.

FOMO (fear of missing out) isn’t exclusive to the cryptocurrency space. The fact is, it’s simply impossible to predict a future crash in the market which is why we should avoid getting caught up by the hype, and invest intelligently into projects with a proven track record, stable roadmap and whitepaper. 

Despite being in its infancy, crypto has had a history of volatility which some would define as bubbles forming and bursting with certain projects. 

Let’s dive a bit deeper into crypto and look at some examples of crypto bubbles.

Examples of crypto bubbles

When it comes to Bitcoin and crypto, most investors think of the rise and fall of valuation not as bubbles, but as ‘bear’ and ‘bull’ markets.

There is a clear distinction between the two terms. One implies FOMO-fueled mass delusion and overoptimism whereas the other describes the expected growth and decline of value that is often based on more tangible factors.

These factors could be a Bitcoin halving, mass adoption, or a project reaching a checkpoint on its roadmap. With that being said, let’s focus on what some refer to as ‘crypto bubbles’ of the past.

Bitcoin bubbles

Did you know that Bitcoin has had a history of what some would consider ‘bubbles’ already? 

Dollar Parity Day in 2011 (BTC from $1.06 to $0.67)

In February 2011, Bitcoin’s valuation reached a dollar resulting in what some refer to as ‘Dollar Parity Day’. This milestone got a lot of people talking about Bitcoin, resulting in numerous news articles giving crypto and Bitcoin much-needed exposure. Bitcoin’s valuation peaked at $1.06, but eventually hit a bottom of $0.67 a couple of months later in April.

Silk Road & Dark Web controversy of 2011 (BTC from $30 to $2)

There have been numerous instances of Bitcoin reaching new heights before crashing downwards. Another noteworthy example would be when drugs were being illegally purchased via the Dark Web on a marketplace called Silk Road.

At the time, most people thought every Bitcoin transaction was completely anonymous resulting in a lot of negative press coverage for Bitcoin. This happened at a crucial time too as Bitcoin was just starting to gain momentum, and many exchanges were being created. Around this time, Bitcoin had tripled in value reaching around $30 in June of 2011.

Five months later in November, BTC had crashed down to just $2.

The crash of 2017 (BTC from $20,000 to $3,164)

The most famous Bitcoin bubble happened in 2017 when the price of Bitcoin dropped from around $20K to $3,164 over a 12-month period.

This was fuelled in part by what you could consider the birth of FOMO in the crypto space. Many new crypto projects started raising money via ICOs which excited investors wanting to get on board early with what they thought could be ‘the next Bitcoin’. As a result, many investors got burned by scam projects and those capitalising on the hysteria rather than legitimately raising funds for a complete project.

Are crypto bubbles and crashes the same? 

The most recent and notable example of a failed crypto project is Terra LUNA in 2022. As we recently covered in our previous article, on May 9th 2022, Terra’s stablecoin UST dropped below $1 which resulted in it becoming depegged.

This happened due to mass withdrawals from a DeFi protocol (Anchor Protocol) on Terra’s blockchain which consequently triggered the plunge in UST’s value. LUNA was previously one of the biggest cryptocurrencies on the market with a peak valuation of $119.51.

On May 13th, the Terra blockchain was stopped due to the crash and attempts were made to try and stabilise the decline, but at that point, nothing could be done. Does this mean that Terra LUNA was a bubble? In our opinion, no, but it is a good example of how an over-hyped project can crash and impact the whole crypto market. 

However, after this incident, we started to see article headlines such as ‘has the crypto bubble burst?’. For many news outlets, this seemed like a good opportunity to spread further fear about crypto. This seems somewhat misplaced though and comparable to concluding that the entire traditional currency market has failed due to some of the weakest local currencies in the world.

Such generalisations are not only inaccurate but damaging to the crypto space as a whole and misleading. For example, Bitcoin at its peak of around $67,000 in late 2021 gradually fell 55% to around $30,000 in May 2022 due to various different factors. Many considered the $30,000 price to be the ‘fair price’ of Bitcoin. Then at the end May 2022, the collapse of Terra LUNA began and drove Bitcoin down another 40% to just under $19,000. Since then, Bitcoin has started to recover and has recently peaked at nearly $25,000. 

Bitcoin, along with the whole crypto market suffers from volatility on a good day, but the events of Terra LUNA caused extreme volatility and the strongest projects are already recovering. The Terra LUNA crash should show how unpredictable the crypto market can be, but also how resilient the space is as a whole.

Other bubbles in history 

There have been many different bubbles throughout history that were not only unexpected but caused massive damage. We briefly mentioned two of the most famous recent bubbles, ‘The Lost Decade’ of Japan early running from the 1990s until the early 2000s and the ‘dot-com bubble’ of the late 1990s. Let’s explore bubbles in more detail. 

The dot-com bubble of the late 90s

The dot-com bubble is probably the most commonly related bubble when discussing crypto. It was caused largely by speculative investing in new and exciting internet and tech-based businesses.

Between January 1995 and March 2000, the NASDAQ Composite index surged 582% fuelling over-optimism and careless investing. Many dot-com companies were overvalued due to a lack of fundamental analysis which would have allowed for a more level-headed perspective.

Between March 2000 and October 2002, the NASDAQ had fallen by 75% leading many companies to close down. The ones that managed to survive such as Cisco lost up to 80% of their stock value.

United States housing bubble

An example of a more recent bubble in the mid-2000s was real-estate where property value started to rise as a result of high demand for homeownership and loose lending conditions. This combined with government incentives and low interest rates led to an increase in those eligible to buy their own homes. This also meant many people were buying property to flip for profit too. 

However, when the stock markets started to recover from their slump, as did interest rates, this eventually caused property prices to fall sharply causing massive negative equity for many home owners. This resulted in a sell-off of MBSs (mortgage-backed securities) due to houses with adjustable-rate mortgages being refinanced at higher, less attractive rates.

Conclusion

So is crypto a bubble? Like all markets, nobody knows for sure what the future has in store for the cryptocurrency market. Bitcoin in particular has repeatedly proven its resilience, bouncing back and reaching new heights after experiencing long extended bear markets. Bitcoin’s future looks to be fairly stable, but other cryptocurrencies haven’t got the same proven track record just yet.

Bitcoin operates as a store of value whereas many other cryptocurrencies function more like utilities with a much smaller market cap than BTC. This also means that it can be difficult to determine use cases for some projects leading some to think back to the mistakes made during the dot-com bubble. 

In our opinion, Bitcoin and decentralised digital currencies are the future. There’s no going back from here, the only question is whether CBDCs will adversely impact the growth of the cryptocurrency space through forced centralised alternatives to Bitcoin. If not, what about regulation? Does that pose a serious threat or is it a a much needed opportunity to tackle crypto scams, Ponzi schemes and protect users? There is still a lot of uncertainty surrounding how cryptocurrencies as a whole will function in the future. 

To conclude, we don’t believe that Bitcoin or crypto is a bubble that will eventually burst and become worthless. However, some projects that operate within the cryptocurrency space do have the potential to surge and then crash. Just looking at the recent rise of meme coins such as Shiba Inu and Dogecoin proves that a lot of money is thoughtlessly thrown into projects that offer no use case whatsoever. Understandably this would leave hard working leaders from real projects frustrated, claiming that meme coins make a mockery of the space as a whole.

As always, invest with care. Only consider projects with a proven track record, reliable leadership, and a solid roadmap.

What are your thoughts on cryptocurrencies? Do you think the crypto space is one big bubble waiting to burst, or do you think we are at the start of something that will change the world of finance and eCommerce forever?

Please let us know what you think in the comments below.