Flash back to 2017, the cryptocurrency markets were green. The greenest they have ever been. Money was flowing. Traders and investors were self proclaiming their genius. But on the sideline sat sceptics calling it a crypto bubble.
Irrational money forms a crypto bubble, or any type of financial bubble for that matter. It’s not a term exclusive to cryptocurrency. The most famous example of a financial bubble is what’s known as the Tulip mania.
A different kind of bubble
In the Dutch Republic in the 17th century the tulip market went crazy. After the introduction of tulips they became a sought after commodity. Rarer strains of tulips were being bought for ludicrous prices and as the demand grew, the prices continued to shoot upwards. Before long people were speculating on the prices of tulips with margined derivative contracts and the prices skyrocketed. Shortly after this the tulip mania died down and prices started dropping. Those that had bought tulip bulbs with loaned money had to sell to pay their loan, resulting in a market crash fueled by cascading selling.
The tulip mania is a perfect example of a market bubble that’s completely driven by irrational speculation. This can be directly translated to crypto to observe what people refer to as a crypto bubble.
The famous crypto bubble
Basically, a crypto bubble is thought to be when the prices of cryptocurrency are too high, driven purely by speculation instead of being fueled by real world adoption and use. This has happened before.
Back in 2017 the cryptocurrency markets were hugely irrational. Almost every single cryptocurrency available for purchase returned positively and investors were truly euphoric. However, as any seasoned investor knows, a bull market to that degree can’t last forever.
In early 2018 the market dropped hard, and then continued to fall for over a year after. Suddenly those that had made huge profits were now experiencing equal or bigger losses and the appeal of crypto was dwindling.
Interestingly, the crypto crash didn’t come as many predicted. It was ultimately thought that if we were in a crypto bubble, the resulting crash would eradicate almost everything. Instead, cryptocurrency is still around today and in 2019 the markets started heating up once again.
Speculators are starting to come back, but sceptics still remain. No one is sure whether the crypto bubble has truly popped, or perhaps it’s not a bubble at all.
If you compare it to the dot com bubble it seems a bit more clear. In the late 1990s the internet was all the rage and any company associated with the internet gained massively in terms of share prices.
There were internet start ups everywhere with huge valuations – but not many of them made it through the first crash. However, those that did are now some of the biggest players on the internet today and their market caps dwarf the peaks of the dot com bubble. Could crypto follow the same path?