Bitcoin had a stellar comeback and traded close to USD 65,000 per unit at its peak last month. There are stories of early transactions involving pizzas that were sold for a five-digit amount of the cryptocurrency around 2010. Regardless of being fact or fiction, the magnificent price increase in Bitcoin is unprecedented. An investment of just USD 100 in 2011 would have resulted in a three million dollar fortune in 2021. Apart from single stocks, no other asset in documented economic history had a similar price increase over a decade.
Cryptocurrencies are not a store of value or an income generating asset. their only reason is to speculate on price appreciation. Cryptocurrency enthusiasts buy into the idea that the supply of bitcoin is limited. therefore, digital currencies are supposedly much more attractive than fiat currencies, which are printed without control. however, cryptocurrencies can be forked. bitcoin has already been forked several times. the supply of bitcoin has grown faster than the number of dollars since its inception. Furthermore, there are over 4,000 altcoins that have been created out of thin air. that is much more than the amount of fiat currencies that exist. The facts are that there are no shortages or supply limits on the leading cryptocurrencies.
Reading: Bitcoin bubble in terminal stage
Security is another worrying issue. Millions of dollars worth of cryptocurrencies have already been hacked. furthermore, the technology behind wallets is not as easy to manage as bank or brokerage accounts. neither are their legal frameworks.
the bubbles had some typical characteristics historically. valuations indicated little chance of positive real return and buyers base their case on something else. Throughout history, successive market manias have been rationalized on the grounds that history is no longer a reliable guide to the future. instead, market participants argued that “this time is different.” Another common feature of a bubble is an exaggerated growth story. The running gag is that it took 20 years to grow 6k into 250k with amazon stock. the same increase materialized with cumrocket, some altcoin, in two weeks. irrational exuberance is another typical characteristic of bubbles. cryptocurrencies check all the marks of different bubble characteristics.
(Source: Frontiers in Public Health 5(33):201, Epidemiology of Ebola Virus Disease in the Western Area Region of Sierra Leone, 2014-2015, March 2017)
when does the bubble burst?
prof. Robert Schiller of Yale University noted that past bubbles exhibited a hump-shaped function. he shows parallels with the concepts that epidemic researchers discovered regarding the spread of disease. Today, most of us are familiar with the way the corona spreads in exponential waves and eventually fades away. that’s similar to other epidemics and the graph above shows the epidemic curves for ebola. bubbles are a psychological phenomenon and investors are similarly essentially infected with a mental virus. a hump-shaped feature, which is typical of epidemics, is probably forming in cryptocurrencies right now. public interest appears to have peaked, according to google searches. search interest for the strings “bitcoin” and “cryptocurrency” is fading. time will tell if public sentiment has peaked and the last fringe buyer is already in.
Buy demand also appears to be fading from a technical standpoint. bitcoin is representative of most cryptocurrencies and the momentum has started to weaken over the past few months. there was a divergence between the most recent price high and the strength, indicating a decline in buying demand. Adding investor behavior to the technical picture indicates some sort of outgrowing process. most likely at least a local maximum is forming at the time of this report plus-minus three weeks. this could even lead to a lasting top unless momentum and sentiment pick up. a late summer recovery is shown in black on the chart below. both scenarios are likely given today’s evidence. some cryptocurrencies are likely to peak in the coming weeks, while others will peak later this year.
Bitcoin looks like a bubble, smells like a bubble, and sounds like a bubble. which is based on fundamental, behavioral and technical evidence. the supposed profits of cryptocurrencies are mostly sell stories. its sole economic purpose is speculation that a price bubble continues to inflate. There is nothing wrong with investing in bubbles for early adopters. however, being late to the party is often a disaster for investors. the fundamentals behind cryptocurrencies leave little room for doubt that they are a bubble. the evidence reveals that non-asset-backed cryptocurrencies are likely to be in the terminal stages of a bubble, unless interest picks up again. The bottom line is that the crypto bubble is likely to burst sooner rather than later.