Probably the most common objection to investing in cryptocurrencies is that they are in a bubble which is primed to burst. I’m not going to argue that they aren’t in a bubble, they certainly are. Financial bubbles are a result of asset classes being tremendously overvalued, which happens in ALL markets in circular motions.
let’s look at another ‘tech’ related bubble, the .com bubble or the original tech bubble of the early 2000’s.
The Dot com bubble was when investors in the late 90’s poured money into Internet start-ups in the hope that they would become profitable. The internet was a new technology and for good reason many investors got excited about the future of the internet. Investors were piling their money into anything that ended in .com for purely speculative reasons. This is similar in the crypto currency market, where there are hundreds of initial Coin Offerings that provide little real-world value, yet hundreds of millions of dollars are raised in their ICO.
The Dot com bubble eventually burst when the process of ‘Commercialisation’ took place. Commercialisation is just another way of saying when the general public adopted and widely invested in the technology. In the case of the Dot com bubble, it peaked on the 10th March 2000. I personally don’t believe that mass adoption of cryptocurrencies has occurred yet, the barriers to entry have been extremely high and the media do not portray cryptocurrencies as a legitimate investment vehicle (yet). We’ve had an extreme surge of speculation in the market, especially around the end of 2017 and the beginning of 2018. Which has subsequently led to a ‘crash’ in the market.
It is worth noting that the tech bubble had a total market cap of over 3 trillion USD, and if you take into account inflation this figure would be around 5 Trillion today. Cryptocurrencies have not even come close to this figure yet, and in this article, I will explain why I believe we will easily see a market cap of at least 5 trillion in the next couple of years.
After the .com rally peaked, it fell by near 80% from the peak of 5,132 points to the low of 1,135 points and then began its next rally. The total market cap for cryptocurrencies has fallen from 833B to just below 250B which is around a 70% decrease, we could see further falling until we reach stage 1 again (see below).
Since the peak of the tech bubble, it has increased by more than 2,500 points or an additional 50% since the peak of the bubble. The point I am trying to make is that even after the tech bubble burst, there was a larger bull market that followed. This is why you will often hear long term investors in the stock and real estate markets state that they are not concerned about crashes as they are simply part of market cycles. In order to keep this article short(er), I’m not going to be arguing this statement. Data from various markets tell us a few things…
- Assets normally begin by being undervalued
- Assets then become ‘fairly’ valued
- Assets then become overvalued
- Assets crash and move to the long term moving average
You’ve probably seen this chart a few times before, but it is worth highlighting for my argument:
Both the charts below follow this famous valuation cycle, I believe we are in between the ‘Capitulation’ and ‘Despair’ phase for cryptocurrencies.
The tech bubble has a lot of similarities to the cryptocurrency bubble, if we compare the charts they look almost identical.
Purely based on the charts above, it seems as if cryptocurrencies does indeed have further falling to go.
Another, The big boys are coming to play. Unfortunately, funds who manage billions or even millions that want to enter the cryptocurrency market are not going to purchase when the market is clearly in a bull market, so they pay journalists and potentially even hackers to ensure the market cap falls significantly so they can buy. This is classic manipulation and it occurs in every market, because the cryptocurrency market is so small and so reliant on speculation, it is very easy to emotionally control.
Institutional investors are very likely going to enter soon, especially with more regulations on cryptocurrencies. As the technology is implemented into businesses globally and as more people become aware of the actual potential of blockchain. There are high chance to bitcoin price rise again and we will be the ones that reap the rewards when the majority come into the market.