Is there any possibility that the Bitcoin bubble may burst due to coronavirus pandemic fair? This is the most common question we receive since the cryptocurrency appeared to hit the market. Many investors consider cryptocurrencies as an overhyped trend without any real value. In the following section, we will see the concept of a financial bubble and why bubbles are not always bad for investors.
18 March, 2020, | AtoZ Markets – Bitcoin is the world’s most famous cryptocurrency. A tech person named Satoshi Nakamoto has created bitcoin besides the blockchain technology. However, as the Bitcoin is very new in the investment sector compared to the other financial instruments, many people think that bitcoin is a bubble and it will burst.
Moreover, some people think that Bitcoin is not a currency at all. It is an online element that is often used by hackers and criminals.
However, the bubble in the financial market means a massive movement on one side that is covered by the opposite party immediately at the same speed.
So is Bitcoin a bubble? Let’s find out!
What Does Bubble Mean?
In the financial market, the “bubble” is a state where a financial instrument stays stalled for the longest time. Therefore, it explodes and its price skyrockets through the upside. The word “burst” was referenced when this asset’s price drops down massively as it goes up.
The fall should be very specific. Here specific means permanent. If an asset manages to rise again, it does not mean the “bubble burst”.
How can you measure the bubble and what is the exact time to say that the bubble is bursting?
It is not easy enough to say.
If you’re an expert in cryptocurrency since its inception, you may be able to tell a thing or two about its future. However, in terms of cryptocurrencies, it is very important to say that they are absolutely unpredictable and volatile.
If you have seen the Bitcoin price movement from the beginning of the release, you can see how it moves from a cheaper price to higher. There are so many unpredictable things that may affect the coin’s price, which is almost impossible to keep up.
Now we will see what causes the bubble in the financial market.
The Causes of Bubbles
According to some financial market researchers in the 1980’s, bubbles are considered to be “a situation when speculators purchase a financial asset at a price above its fundamental value with the expectation of a subsequent capital gain.”
After 30 years, following the bubble of the 1980s and the dotcom bubble in the 2000s, researchers added upon their definition of bubbles by adding the word “speculative.”
Access to the financial market has increased rapidly since the past few decades. Therefore, it allows people to invest in the stock market directly. Therefore, retail trading has expanded massively throughout the period. Speculating on the stock values and bonds became very popular, which brought the concept of “speculative bubbles”.
It described as “a situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person…in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”
Another concept is that the speculative bubbles are the possibility of selling assets that investors do not own, which is known as “short selling”. Therefore, further accelerated by “shorting” by creating derivatives markets, such as options and futures.
As more people started to participate in financial markets, it became like the speculative bubbles could be rational and irrational. The speculation and contagion led negative bubbles to be a mirror image of a speculative bubble. As a result, there might be a dramatic price fall.
Three Stages of Bubble
People usually define financial bubbles in many different ways. However, the major three major things we should remember:
- In the beginning, the price of an asset should be very low and not noteworthy. It changed a bit, but the change is not much compared to the market structure. At this stage, people don’t give much attention. In this situation, there are no notable changes in the price to attract investors’ sentiment.
- At a certain period of time, the asset starts to gain attraction and rise in price. The thing that makes growth makes it different from other normal assets that grow intensity. The price increases with a massive intensity and speed. This might happen because while people see that the asset is moving up, they want to make an investment in it to make a quick profit. Therefore, the more people start joining in the rally, the faster the price inflates. It happens just like a bubble.
- The third and final stage is known as a breakdown. The price rose without any apparent reason, so it fell. In this stage, people start panic-selling all their assets. They fear that the price may crash even more and they’ll lose all of their investment. Therefore, it becomes a never-ending process until the price completely crashes. In other words, the bubble bursts.
Now, let’s take a look at the price chart
This is the Bitcoin price chart. It represents the inception of price from the beginning until the present day.
As you can see, this chart has most of the features of a bubble. A slow beginning, then a sudden peak and an equal drop. However, the last part is a bit different. The price didn’t drop to zero; rather, it started to stabilize.
So is Bitcoin a bubble?
Bitcoin Bubble in the Coronavirus Pandemic
In a bubble, those who bought the asset early had made a paper profit. In case they miss out on more gains the selling pressure dries up.
More buyers compared to sellers’ causes the price to rise sharply.
However, in a bubble, FEAR and GREED means that more buyers are stuck in the market, therefore, it gradually worse price levels. On the other hand, smart investors start to behave like idiots once their emotions take over.
You may have heard people talk about the inevitability of price rises about the value of the underlying asset.
This is how the bubble happened with Bitcoin in 2017. However, the same thing we are watching in the Bitcoins market.
At first, the market stalled around $6000 to $7000 area and moved up impulsively above $10000 area as soon as the coronavirus appears in China. Later on, the price covers most of the bullish move with bearish engulf. This is a clear sign of a bubble to burst.
At the beginning stage, people bought Bitcoin because they believed in the asset itself. Even though buyers do not talk much about Bitcoin as the future of money, nearly all buyers today are impulsive buyers.
In March 2020, Bitcoin failed to cope with the price sentiment and fell from $10000 to $4000. There is no doubt that the market was overheated by new investors trying to get on the hyped train by pumping the price higher.
Bitcoin Bubble is not Bad
Some economists believe that bubbles are integral to make a correction to motivate a large influx of investments. For example, the dotcom bubble brought optic fiber cabling on a global scale. Therefore, there was the creation of a worldwide network. That capacity was not demanded, and so a lot of companies went bankrupt.
During the crash of dotcom stocks, Amazon securities made a loss of about 90% of their stocks that is more than Bitcoin lost in 2018. After that, when the market was cleared, Amazon was not able to catch up with the significant increase in capitalization.
The same situation we have seen with Bitcoin. For almost 8 years the bitcoin price grew gradually. In 2017, the price jumped from $2000 to $19000 within 6 months. Therefore, it collapsed drastically to $6000. At that time, everyone criticized the digital currency may vanish. Some experts also expected the bitcoin to fall to $100. Therefore, the fundamental parameters of Bitcoin have strengthened. Therefore, people have contributed about $3.12 billion in projects related to Bitcoin, which is four times higher than in 2017.
Moreover, institutional companies such as hedge funds, pensions, etc. are thinking of adding cryptocurrency to their portfolio. Some companies are launching regulated exchanges like cryptocurrency futures and ETFs as more people consider Bitcoin a safe- haven asset.
As of the current discussion, we can say that the Bitcoin bubble does not mean making an investment in bitcoin is the wrong decision. Moreover, it is not like that the bitcoin is just a hype, and it will vanish forever.
Bitcoin is the true dominator in the cryptocurrency market. On The other hand, in the investment sector, cryptocurrencies are becoming very popular day by day. Many financial institutes and hedge funds are making an investment in cryptocurrencies. The most unique feature of the cryptocurrency is that it follows the decentralized nature of blockchain technology.
In the present world, people are losing hope on the centralized currency system as it is controlled by a third party. Therefore, it is high time to find an alternative option to keep the money safe and secure.
Think we have missed something? Let us know in the comment section below!