Bull runs and bubbles. Most people consider an exceptional bull run to be the beginning of a bubble that will inevitably pop. Certainly, every asset that shot up quickly and exponentially within a short period of time has its own anecdotes from economists and bankers. Here’s the thing: When prices shoot up, FOMO gets real. People panic and mob mentality takes over. Cool heads often prevail and pivot while hot heads tend to lose their shirt and chase a moving target up before their bubble pops.
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Of course there are indicators that a market becomes unsustainable. What goes up must come down, right? That’s correct in gravity, but how about the markets and any trend in the history of making money. The (dot)com bubble, real estate bubble and the ICO bubble all burst. Even Bitcoin’s historic bull run of December 2017 had many economists labeling it a bubble, so when the massive correction occurred, it was labeled the subsequent burst.
Bull Runs and ROI
If the historic bull run was a bubble, then Bitcoin has a history of blowing bubbles and watching them burst. In 2014-15 there was a bull run similar to the one in 2017, only lesser in magnitude, yet despite these bubbles, Bitcoin has an ROI of 6582% from the date of its launch to now. Though the fact that traders who exit in the last bull run are in a better place financially is undeniable. Does that make it a bubble or a long term upward trend? The answer is: it depends on how far back in history you’re looking and where you entered the market.
The Reality of the Bubble
For investors who didn’t exit at the right time, staying longer in potentially innovative and revolutionary markets, bubbles serve as an experience. They can wipe out life savings and entire portfolios if investors are not cautious.
According to the efficient market theory argument, price movements of an asset are based on the sentiments of investors, and it can be hard to find why investors would be bullish enough to cause the price to skyrocket. Their assessment of long term earnings from the asset becomes a belief and they go all in. This is how bubbles are created.
There was no real reason for the bullish sentiment of 2017; in fact, investors are five times more bullish in 2019. Cryptocurrencies have no competition and this may be another reason this particular bull run may be longer than any other in Bitcoin’s history.
Regulators and financial watchdogs have clamped down on Bitcoin repeatedly for the massive volatility and market instability. Despite this fact, investors have been accommodating and have a positive sentiment. Bitcoin’s alternatives are technically superior and still haven’t been able to take down its single-handed market dominance. This indicates an anticipation of an upcoming price bubble and the following crash.
Recipe of a Bitcoin Bubble
It may seem overwhelmingly plausible that Bitcoin has survived cycles of rise and fall in prices and it is governed by rational optimism, FOMO, and the following dump. The market aggregates irrationality, optimism and unaccounted belief in upcoming bull runs, this is the recipe of a Bitcoin Bubble.
The market is rife with uninformed investors, noobs and whales throwing fiat away for crypto. Their hard behavior, cynicism and speculation creates and bursts the bubble.
The Aftermath
In every cycle, most new entrants and less informed investors get burned in the zero sum game. Their stories of bankruptcy and losses make the headlines for several months following the bursting of the bubble. Their life savings vanish into thin air within a matter of minutes or days.
Though inevitable in case of average Joes, this fate is avoidable. Technical and Sentiment Analysis, risk analysis and mitigation and careful balancing of portfolios make it easier for a trader to predict and steer clear of the market hype. Limiting exposure to risk, their portfolios survive the bubble and its aftermath.
What can conclude from Bitcoin’s bubble episodes is that there is no sure bet in crypto. Cycles and history keeps repeating itself due to more and more new comers entering the crypto world and the ever optimistic evangelists going all in on Bitcoin.
The fact that a highly volatile asset class cannot replace fiat currencies is clear. Bitcoin’s adoption is on the rise, but it isn’t replacing the global standard, only working alongside it. And, at this moment, it’s not practical to settle bills in Bitcoin, but trading it as an asset is a sure way to increase your portfolio value.
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