In recent years, cryptocurrencies have experienced a rapid rise in popularity. Their decentralization, anonymity, and potential for high returns attract increasing investments. However, alongside this, concerns are growing among some experts about the overvaluation of digital assets and the stability of the cryptocurrency market.
What is a market bubble😎?
A market bubble is a situation in the market when the price of an asset significantly exceeds its real value, which sooner or later leads to a sharp decline.
Economic bubbles do not arise suddenly. Their formation can take months or years, and they can encompass any area of the economy—from real estate to stocks.
Although some experts consider economic bubbles a myth, most economists do not share this view and highlight several reasons for their occurrence:
irrational behavior of investors and the desire for quick profits;
low-interest loans that encourage borrowing and increase purchasing power;
the instinct of group behavior, where a person thinks that the majority cannot be wrong, especially if they are well-known investors and financial institutions.
Interestingly, predicting an economic bubble is difficult. It usually becomes apparent at the final stage when the price of an asset sharply decreases.
Is cryptocurrency a financial bubble?
Some investors and experts consider the entire digital asset market to be one big bubble. For instance, in April 2023, famous investor Warren Buffett stated that Bitcoin is a "gambling cryptocurrency, and it has no intrinsic value."
It should be noted that the concerns of some experts are not unfounded. There have been cases in the history of cryptocurrencies where market bubbles did occur.
For example, at the end of 2017, the price of Bitcoin sharply rose to $15,000, after which it fell to about $3,500 in 2018. This crash dragged down all other cryptocurrencies, and at that time the digital asset market fell by almost 80%.
In 2022, a similar situation arose when the Luna token and the UST stablecoin crashed, devaluing in just a few days. However, the market gradually recovered, and the prices of most digital assets returned to previous levels, although other bubbles occurred, such as the bankruptcy of Celsius Network or the collapse of the FTX exchange.
Nonetheless, the overall trend shows that the crypto market continues to grow. The global capitalization, which at the time of writing is around $2.7 trillion, is almost 180% more than last year’s figure. This indicates that despite periodic bubbles, the overall interest in investing in the cryptocurrency market is growing.
Comparison of cryptocurrency bubbles with stock market bubbles
The features of stock and cryptocurrency bubbles have both common and distinctive traits.
General characteristics:
speculative nature: both types of bubbles are caused by speculative behavior of investors in the desire to earn quickly;
investor sentiment: in both the stock and cryptocurrency markets, investor sentiment is amplified by social media and the media;
irrationality: investors often ignore or underestimate the risks associated with assets;
volatility and price correction: high volatility and sharp price corrections are characteristic of both types of bubbles;
market manipulation: manipulative practices, such as pump and dump schemes, accompany both markets.
Differences:
materiality: stock bubbles concern physical assets, while cryptocurrency bubbles are focused on digital ones;
global reach: cryptocurrencies are accessible to investors everywhere 24/7, unlike stock assets;
regulation: the stock market is controlled much more strongly;
accessibility: cryptocurrencies provide lower barriers to entry for investors compared to traditional assets.
Which cryptocurrencies are companies investing in
As more people invest in and use cryptocurrency, companies see this as an opportunity to serve a broader customer base. This is a beneficial business strategy, and therefore more organizations are investing in digital assets and holding a significant portion of their capital in them.
Prospects of blockchain
Blockchain technology represents a revolutionary approach to storing and exchanging information that has the potential to radically change many sectors of the economy. Blockchain is already demonstrating its impact through cryptocurrencies, offering secure and transparent transactions without the need for intermediaries like banks or brokers.
However, this technology can be used not only in the financial sector. For example, in logistics, blockchain can provide transparency in supply chains, allowing consumers to verify the origin of products.
The medical sector may also undergo transformation. Blockchain allows medical institutions to create secure electronic medical records that ensure the accuracy of information. This contributes to efficient management of patient data and reduces the amount of paperwork.
The use of blockchain in retail also has its advantages, such as the ability to verify the authenticity of products, which is particularly important for jewelry, electronics, and pharmaceuticals.
One of the key areas of blockchain development is its increasing application in the corporate sector. Blockchain offers enterprises enhanced security, high transaction transparency, and protection against cyber threats.
Conclusions
In the history of cryptocurrencies, there have been periods when financial bubbles arose. This phenomenon is not unique to cryptocurrencies and is an inherent part of the evolution of any economic sector, especially those that develop as rapidly as the digital asset market. However, despite this, cryptocurrency and the blockchain on which it is based have significant potential to benefit society in many areas.
Thus, although cryptocurrency markets may experience periods of instability, the overall contribution of digital assets remains significant on a global scale.
