Are we in a crypto bubble?

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Are we in a crypto bubble?
Businesswoman working on tablet with bitcoin cryptocurrency link network and online concept.

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With recent fluctuations in cryptocurrency values, many investors are wondering what the future holds. Current investors may fear losing money if a crypto bubble bursts, while new investors may be curious if now is a good time to invest their money.

Crypto investors of all levels should consider the current state of cryptocurrency, how crypto bubbles work, and how to recognize these trends.

What is a crypto bubble?

A bubble occurs in a market when an asset has a price higher than its value. Typically, investments and assets are valued based on factors such as demand, earnings, growth potential and more. In some cases, however, the value of an asset will increase more than expected.

A crypto bubble forms under the following circumstances:

  1. Excitement over a specific asset causes prices to rise rapidly.
  2. Investors notice the increase in value and invest in the asset, further increasing the price.
  3. As more and more people invest, the price of the asset will exceed its intrinsic value.

Not all rapid price increases indicate a crypto bubble. For example, price jumps can occur during recovery periods after a recession. The main difference is that these price increases can be justified by the traditional factors used to evaluate an investment.

Are we in a crypto bubble?

It is difficult to assess whether the value of various cryptocurrencies are justified or if they are simply overstated due to excitement. Traditional investments are valued based on business performance and other financial metrics, while cryptocurrency is primarily valued based on factors such as demand, production cost, and competition.

Bitcoin, one of the most popular cryptocurrencies, is said to have many bubbles over the years:

  • In December 2017, its price reached over $13,000 before breaking out.
  • In 2019, its value rose from a low near $3,400 to over $12,000.
  • In October 2021, after many dips and peaks, Bitcoin reached over $61,000.

While Bitcoin’s current price has since fallen to its current value of $21,450.54, as of August 23, 2022, it is still much higher than many skeptics thought it would be when cryptocurrencies were introduced for the first time. It is difficult to determine what caused these fluctuations in The value of bitcoinbecause much of the value comes from speculation.

How Crypto Bubbles Work

In any market, bubbles form and burst in a similar way:

  1. Bubbles usually start with something that causes investors to change their view of a particular investment or investment vehicle. In this case, the invention of cryptocurrency may have been a catalyst for exciting new investment opportunities.
  2. Then, investors will start to hear about the potential gains from the investment in question.
  3. Speculators will start to try their luck, further increasing the price and attracting even more investors. Using Bitcoin as an example, its growth period from 2017 to 2019 is indicative of this phase.
  4. At its peak, the bubble will attract many new investors who believe there is little risk and much to gain. They can make unwarranted investment decisions, which will drive the price even higher.
  5. Finally, some investors may lose money, which will then cause others to sell their shares. This causes a snowball effect, and while some investors may come out with gains, those who are too late to sell may end up with significant losses, and the price of the investment will fall back.

While Bitcoin’s highest prices in 2021 were followed by steep declines, it is unclear if this is a true crypto bubble as the factors used to value cryptocurrencies are difficult to determine. .

How to recognize bubbles

The best way to recognize a crypto bubble is to understand market behavior described above. However, many investors will not recognize a bubble until it has burst. Additionally, identifying crypto bubbles is more complicated than bubbles in traditional markets.

With traditional investments, an investor may be able to predict a bubble if the price begins to rise above the actual value of the investment. Individuals can view company performance, financial metrics, and other factors to determine the true value of the investment.

When it comes to cryptocurrency, however, these traditional factors cannot be used. An investor may be able to identify crypto bubbles by examining investor mentality. For example, if a sharp price increase occurs immediately after a viral social media post, investors may be excited about a new opportunity.

The future of cryptocurrency

The cryptocurrency market is expected to nearly triple by 2030. While more governments, businesses, and individuals are open to cryptocurrency, there is still a lot of skepticism about the value of crypto -currencies and how to implement balanced regulation.

People who invest in cryptocurrency identify benefits such as easy payment management, accessibility, and closer collaboration with other people rather than banks and large organizations. However, they worry about market volatility and the safety of their assets.

Due to these factors, there are mixed feelings about which big companies are investing in cryptocurrency and who have the regulation of government places on the industry. Since many investors like the non-traditional system used by cryptocurrency, they doubt it will become more corporate.

Going forward, governments, businesses, and individuals will need to work together to create a system that balances the need for regulation with the desire to retain the existing peer-to-peer structure of cryptocurrency.

Carry

It is difficult to determine if a crypto bubble is building. Therefore, investors may not know whether they want to invest in cryptocurrencies or not.

When making investment decisions, individuals should consider their reasons for wanting invest money. For example, if someone is investing in cryptocurrency simply because they want to join the crowd, they may want to take more time to determine if the investment makes sense.

Information is accurate as of August 24, 2022.

Our in-house research team and on-site financial experts work together to create accurate, unbiased and up-to-date content. We check every stat, quote and fact using trusted primary resources to ensure that the information we provide is correct. You can read more about GOBankingRates processes and standards in our editorial policy.

About the Author

Taylor DeJesus has been a freelance writer for over five years, where she specializes in writing SEO blogs and other online content for small and medium-sized businesses. She has also written books, research papers and more on a variety of topics, from business and marketing to lifestyle. In her spare time, Taylor enjoys reading, spending time with her daughter, and pursuing her personal development goals.

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