Is crypto a bubble or a market opportunity? Virtual currencies or cryptocurrencies have been the talk of the financial market last year and it will not be different this year, critics expect.
More than its ability to replace the traditional currencies with Bitcoin and its proponents claiming to revolutionize the money market and the entire economy, people talk about its extremely volatile nature and fluctuating prices.
This even takes them to the extent of thinking whether or not cryptocurrencies have really created a market opportunity or is it just a bubble waiting to burst.
Yes, crypto coins are known for their fickleness but adding fuel to the fire are the statements made by major players like Elon Musk and others.
People are thereby forced to consider the crypto space, no matter how exciting it is, to be far crazier.
They are more worried about this crypto or digital currency era than they were at the start of the dot com era.
Most of the dot com stocks became worthless when the bubble burst and the entire industry was valued somewhere at half a billion dollars.
It was the inflation that reduced its value which could have been 1 trillion dollars in today’s market value.
The crypto market, critics feel, is also going through the same phase and they give a lot of reasons to believe that it is just a bubble which will burst soon.
If you want to know more about their views on crypto and its futures, this is the right place to be because this article talks about it looking into every aspect of it including the reasons to consider crypto to be a bubble and several other important ones.
This knowledge will make you more confident if you ever participate in a debate on this specific and hot crypto topic with your friends.
Is Crypto a Bubble or a Market Opportunity?
The global crypto market today is worth somewhere around $2 trillion.
Still people feel that whether it is the BTC- USD pair or the whole cryptocurrency, it is one of the biggest bubbles.
It will burst and when it does it will be really ugly.
Though some of the users feel that it is just a natural pullback of the coin after a magnificent high-value run, most of the crypto experts, major players, and critics feel that it is a popping bubble.
This is in spite of the fact that crypto has become mainstream in 2021 and major banks and other institutions are looking for hiring crypto talents.
Few banks such as Goldman Sachs are even contemplating offering Bitcoin-backed loans.
Other than that, today, most of the major names in different industry sectors are in some way or somehow exposed to crypto, at least to Bitcoin.
Just to name a few, the list would include:
- Meta’s Facebook
- Square and
- Micro Strategy
In spite of the volatile nature of the crypto assets and crypto market, it is the excess liquidity offered by it which facilitates the rise in prices of crypto assets to such exorbitant heights.
With billions of dollars in the waiting to be funneled into the crypto market, it is becoming a gaming, if not gambling, field that is growing bigger and bigger with each passing day.
However, when it is looked at very closely, it is not being used for commercial purposes as it should have been.
In the end, it is more like a betting game where too many people are involved which makes it pretty analogous to when people go back to the housing bubble or the tech bubble burst.
People, as it is, always look to put their money into cyclical trade of stocks because it is a long game, and things are bound to get better, they believe.
And, the crypto market offers them that promise by and large.
However, this may not or cannot stop the crypto market from imploding, and there are a few very good reasons to believe that.
The first good reason is that over the years the crypto market is inundated with a large variety of different types of crypto coins but not all of them stood firm to the test of time.
It is just the early adopters and crypto traders who have made unimaginable riches while others have lost their life savings when the Bitcoin and the crypto universe plunged.
The crypto market is extremely alluring, another reason for it to have so many players involved in it.
It offers a chance to strike rich, big time but it seems to be true for only those who frequent the path.
Moreover, it is these wins that are mostly taken up, promoted, and talked about and the losses are often forgotten quickly.
This means that the ordinary gamblers who believed that crypto is the future of investment and embraced it did so due to their zealotry that keeps them from knowing the reality.
In short, the basic idea of creating Bitcoin, the first ever crypto coin, in 2009 to liberate the general public from the government restraints by offering a truly independent alternative to the global financial system, is still unfulfilled.
More than a decade after its creation, even the most faithful crypto fan cannot however refuse or recognize the irony.
Bitcoin and its 10000-strong imitators are priced in the traditional currencies even today instead of overthrowing them.
That is why even the most fabulously rich and famous measure their wealth in Dollars, Euro, Yen, Pounds, and Greenbacks instead of Bitcoin.
Reasons to Consider a Bubble
The prices of crypto coins can soar to astronomical heights when the time is good and then, in the next instant, can plunge deep down if the time is unfavorable.
It swings drastically even at the slightest hint which makes it an extremely volatile financial instrument to invest in, which is very unstable and potentially lethal.
In comparison, the global real estate and stock market is comparatively tame which is reflected by the respective price charts even after inflating a lot as the rates of interest have been cut down significantly.
This has attracted a lot of people into the crypto market including reputed global fund managers and investments banks are found dabbling in this exciting world.
However, even though retail banks such as the Commonwealth Bank have opened their door to average customers, their trading equations and algorithms fail to offer as great a chance as the crypto market to the small-time traders to make their way to glory.
This is because the world of fiat currencies that claims to be highly stable and the backbone of the nation’s economy is diluted and has become debased by government regulations and interference.
It has been subject to financial crises on a regular basis.
Though Bitcoin claims to be a good alternative, it has also become more or less useless as a reliable medium of exchange because it is slow in transaction and is very expensive.
It is its extreme volatile nature that has rendered it really unreliable and therefore unusable.
In fact, cryptocurrencies are just a plaything that involves high risk and is based entirely on speculation, the primary reason for it to be so unreliable instead of being a safe haven, as promised and expected.
It fails to appreciate as expected during times of crisis.
However, cryptocurrencies still put emphasis on the economic wave but crypto experts believe that it is just a crypto bubble.
Market corrections cannot be entirely ruled out, especially after a high run, even though the new investors have resulted in a lot of momentum in the market.
Due to the increased interest of the institutions on digital assets to use them as a hedge against inflation, major players such as JP Morgan have gone bullish resulting in an increase in the demand for crypto coins last year.
There is also a significant rise noticed in the number of retail participants from all over the world.
However, looking at the supply side, it has also increased notably last year. As of now there are more than 13,000 different types of cryptocurrencies being traded in the market.
Is it good news? No, because more than 90% of these coins would become of no value when the bear market hits.
This is because the fear and greed index is quite high which indicates greed in the market which is primarily due to the high price of cryptocurrencies as of now.
If you take a look at the crypto derivatives data you will see that at this moment the Out-of-the-Money or OTM call options are very much expensive in comparison to the OTM put options whether it is for Bitcoin or Ethereum.
This means that even the most ardent follower of crypto and the most belligerent crypto trader are foreseeing a bullish momentum in the crypto market as of now.
There are several factors and reasons that culminate into such a belief and rally.
One such is FOMO or Fear of Mission Out by the retail investors, especially in the case of those specific coins that are in a state of frenzy, Shiba Inu, for example.
However, this has to subside soon because the market will never continue to move linearly higher for a long time.
Ideally, crypto prices are driven by different pieces of news and no one really pays any attention to the leverage that it offers.
The dangers of random events can result in a subprime price crash rendering it to be a Ponzi scheme.
It is ridiculous to think that someone will value it higher and it would carry on this way.
There is also a growing certainty that the US Treasury and the Securities and Exchange Commission along with the Department of Justice will clamp down on the progress of the crypto market which puts it into a state of further uncertainty.
Also, the term ‘currency’ in cryptocurrency is a misnomer because there is no product or service that is priced in cryptocurrency.
According to a recent Goldman Sachs research report though Starbucks offers the option of buying coffee with Bitcoin to their customers, it is hard to guess that anyone is actually doing so.
The crypto critics believe that Bitcoin and other crypto coins are just big schemes and are nothing but an expense of electricity.
There is nothing right in it intellectually. People actually create ‘nothing.’ It has no utility or cannot be a source of income, they think.
This means that it does not have any basic value, and is far away from being called the digital gold because Bitcoin can disappear one day but gold will not.
Therefore, cryptocurrencies are an antidote to bubbles of central banks and have become a symptom.
Created from thin air and into nothing, these are far from a good alternative to fiat currencies that you can at least touch and see.
Illicit transactions with criminal intent and money laundering along with high possibility of hacking are some other reasons to consider crypto to be unsafe.
Also, the transparency aspect, which it boasts of, is also an overstatement since every transaction is recorded in a blockchain that is distributed publicly and no one knows for sure how much leverage is in use in the crypto markets at any given point in time.
This creates an illusion of activities and ‘wash sales.’
All these are considered to be the mother of all crashes and could also trigger the collapse of the crypto market which makes it a low prospect as a market opportunity.
Therefore, to summarize, the reasons to consider crypto to be a bubble just like the 1999 dot com bubble and housing bubble of 2007, the list includes:
- It has very negligible real-world utility and correlations
- Its valuations related to transaction data make little sense
- Major businesses and institutions are slow in adopting blockchain
- There is literally no barrier to entry resulting in dilution and unlimited competition
- There is doubt among people whether it is decentralized in the truest sense
- It is artificially driven by social comments and tweets that tugs the heartstrings
- A lot of countries and governments are against the use of crypto
- Leverage is a haunting issue of the crypto market and
- Investors frequently overhype and overestimate about blockchain.
However, whether this bubble will remain is to be seen and it is only time that can tell.
There are some specific perils of the crypto bubble that you should be aware of before you indulge in the market in any way.
There are lots of crypto exchanges that have collapsed in the past, and every week, some new names are added to the list of failed crypto exchanges due to the bubble.
Therefore, if you are unlucky and your chosen exchange fails, you will be one of those crypto traders or investors adding up to hundreds of thousands who have lost everything and now find them stranded in the middle of nowhere.
Also, the crypto market is completely unregulated, as you may know.
In such a situation, it is quite hard and unwise to leave all your belongings with the exchanges and expect them to be safe.
In the worst case scenarios, you will lose all of them in an instant.
A good alternative to it is to keep it in a hard wallet or any other form of technology that is less likely to fail, be hacked, lost or forgotten.
Apart from the crypto coins as such, you can even invest in NFTs or Non-Fungible Tokens that includes anything from a piece of artwork to imaginary livestock and real estate, which, mind you, are nefarious.
If the entire thing disentangles, you are bound to incur losses and the amount will be anything but imaginary.
In such a situation, the role of the central banks and authorities further aggravates the pain points of the users.
They are stressed out and are trying hard belatedly to harness the entire phenomenon in.
As of now more than twenty countries including China have imposed a ban on use of Bitcoin and other cryptocurrencies and a lot others are contemplating on the same.
All these point out one specific thing: in the case of a severe collapse of the crypto market there will be a serious negative effect on the real-world economy and the consequences will be nothing less than drastic.
There will be no specific safety mechanisms that can bailout the economy even if it wants to cruise away from the system.
The repercussions due to such situations will be much, much, more serious than anyone can anticipate.
These are not just apprehensions, mind you.
With the given apparition of interest rates rising steeply, it has already started to send a cold shiver through the spines of the high-risk asset markets.
Critics believe that a shake-out of these markets from such conditions is almost certain in near future by the overvalued, overhyped, and overweight crypto markets.
Tips for Investors
The investors at this point may naturally worry and wonder what they should really do to save them from such jeopardy.
Well, it is good to follow the tips of the experts.
They say that even if Bitcoin promises to rise in value and is expected to cross $70,000 and touch the $80,000 mark, they should go against liquidating it.
In fact, they say that crypto investors should not forego their positions on any coin whether it is Ether or any other at this point in time.
Instead, in such a situation, the best thing to do by the investors is to wait and watch for a couple of weeks because a 100% gain probability could be just round the corner.
During this time, the experts suggest that the crypto investors may try their luck out by investing in gaming and metaverse-based crypto coins that have become a popular trend of late.
However, they are always advised to follow a proper and well-thought-of risk management plan for whatever they do.
The experts say that the investors can rest assured that, no matter what, because there is a high likelihood of market corrections to occur when the price of crypto coins, especially Bitcoin, will reach an all-time high.
According to the experts, strange as it may sound, it is probably a good time to book some profits from such situations by the investors who have already invested in this volatile crypto market but play safe.
Investing in the crypto market is not an easy job. You must know about the past, present, and future potential of the particular crypto coin you want to invest in and a lot about the market itself. Thankfully, there are articles like this to help.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.