Are cryptocurrencies a financial bubble?

Cryptocurrencies have experienced a rapid rise in popularity in recent years. Their decentralized nature, anonymity and potential for high returns are attracting more and more investments. However, along with this, there is growing concern among some experts about the overvaluation of digital assets and the sustainability 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 its sharp fall.

Economic bubbles do not appear suddenly. They can take months or years to form, and they can cover any area of the economy, from real estate to stocks.

Although some experts consider economic bubbles to be a myth, most economists do not share this view and identify a number of reasons for their occurrence:

• Unreasonable investor behavior and desire for quick profits.
• Low-interest loans that encourage borrowing and increase purchasing power.
• The instinct for group behavior when one thinks the majority can't be wrong, and furthermore, if they are well-known investors and financial institutions.

Interestingly, it is difficult to predict an economic bubble. It usually becomes apparent at the final stage, when the price of an asset declines sharply.

Is cryptocurrency a financial bubble?

Some investors and experts believe that the entire digital asset market is a bubble. For example, in April 2023, famous investor Warren Buffett said that Bitcoin is “a gambling cryptocurrency, and it has no intrinsic value”.

It should be noted that the fears of some experts are not groundless. In the history of cryptocurrencies, there have been cases when market bubbles did occur.

For example, in late 2017, the value of Bitcoin rose sharply to $15,000 after which it fell to around $3500 in 2018. This collapse pulled all other cryptocurrencies and then the digital asset market fell by almost 80%.

In 2022, a similar situation occurred when the Luna token and the UST stablecoin collapsed and depreciated in a matter of days. However, the market has gradually recovered and most digital asset prices have returned to their previous positions, although there have been other bubbles like the bankruptcy of Celsius Network or the collapse of the FTX exchange.

Nevertheless, the overall trend shows that the crypto market continues to grow. Global capitalization, which at the time of writing stands at around $2.4 trillion, indicates that despite periodic bubbles, the general interest in investing in the cryptocurrency market is growing more and more.

Comparing cryptocurrency bubbles to stock bubbles

The features of stock and cryptocurrency bubbles have both common and distinctive features.

General Characteristics:

• Speculative in nature: both types of bubbles are caused by speculative behavior by investors in an effort to make a quick buck.
• Investor sentiment: in both the stock and cryptocurrency markets, investor sentiment is amplified by social media and media.
• Irrationality: investors often ignore or underestimate the risks associated with assets.
• Volatility and price correction: high volatility and sharp price correction are characteristic of both types of bubbles.
• Market manipulation: manipulative practices such as Pump and Dump cases accompany both markets.

Differences:

• Materiality: stock bubbles concern physical assets, while cryptocurrency bubbles focus on digital assets.
• Global reach: cryptocurrencies are available to investors everywhere 24/7, unlike stock assets.
• Regulation: the stock market is much more heavily regulated.
• Accessibility: cryptocurrencies provide lower barriers to entry for investors compared to conventional assets.

What cryptocurrencies are companies investing in

As more people invest in and use cryptocurrency, companies see it as an opportunity to serve a wider customer base. It's a profitable business strategy, and that's why more and more organizations are investing in digital assets and holding a significant portion of their capital in them.

Here's a list of some of the companies and what they invest in:

• MicroStrategy: investing in Bitcoin.
• Tesla: investing in Bitcoin.
• Coinbase Ventures: the company invests in altcoins such as Aptos (APT), Polygon (MATIC), Celestia (TIA) and many others.
• Block (Square): invests mainly in Bitcoin.
• Pantera Capital: the fund's portfolio includes such crypto projects as Ethereum, Solana, Polygon and others.

Perspectives on blockchain

Blockchain technology is 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 such as banks or brokers.

However, this technology can be used for more than just financial services. For example, in logistics, blockchain can bring transparency to supply chains, allowing consumers to verify the origin of products.

The healthcare sector may also undergo a transformation. Blockchain enables healthcare providers to create secure electronic medical records that ensure the accuracy of information. This facilitates efficient management of patient data and reduces the amount of paper documentation.

Using blockchain in retail has its advantages too, such as the ability to verify the authenticity of goods, which is especially important for jewelry, electronics and pharmaceuticals.

One of the key areas of blockchain development is its increasing use in the corporate sector. Blockchain offers businesses increased security, high transparency of transactions, and protection from cyber threats.

Conclusion

The history of cryptocurrencies has seen periods of financial bubbles. This phenomenon is not unique to cryptocurrencies and is part and parcel of the evolution of any economic sector, especially those that are evolving 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, while cryptocurrency markets may experience periods of volatility, the overall contribution of digital assets remains significant on a global scale.