Is the Cryptocurrency Bubble Going to Pop?
Cryptocurrency has been on a wild ride over the past few years. Bitcoin, for example, had an amazing run before plummeting in 2017. The value of the crypto went from $5,000 to $20,00 in a mere three months before plummeting a whopping 80%.
But recently, Bitcoin has been on a record run once again. It’s approaching, and exceeding, it’s 2017 value, and some investors believe the crypto can rocket up to $318,000 by the time 2021 is over. Ethereum, the second largest cryptocurrency, has also been a run and surged to about $2,300 as of July 2021.
All these price surges have led people to naturally wonder if the cryptocurrency bubble is going to pop like it did back in 2017. In short, we don’t know. But this blog post will outline some reasons why we think the bubble won’t pop this time, and some reasons why consumers should be wary, so that you can make your own informed decisions.
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Why The Crypto Bubble Won’t Pop
There are three main reasons why we think the cryptocurrency bubble won’t pop this time around: digital money is coming, crypto technology is maturing, and businesses and other institutions are beginning to see its value.
Digital Money Is On Its Way
The US Federal Reserve, the European Central Bank, the Swiss National bank, and several other international banks are all working on their own digital currencies known as central bank digital currencies, or CBDCs. Further, the People’s Bank of China has already developed a nationalized digital currency called renminbi.
And thanks to stablecoins, cryptocurrency is becoming a more stable and accessible option. Stablecoins are fixed to central bank denominations – such as the US dollar – and rely on improved crypto wallets for better security when transferring funds from buyer to buyer.
And it’s not a stretch to think that these trends may converge with China and the US merging their electronic payment systems, which is already happening with China. China’s Digital Currency Electronic Payment system will have support for Ethereum, the first country to do so. PayPal has allowed its users in the United States to purchase Bitcoin for quite some time now, and there are plans of adding this new form of currency as another digital option. Paypal account holders can also use bitcoin when purchasing goods, as the company is looking to add the option sometime in 2021.
Crypto Technology is Maturing
Bitcoin mining is one of the biggest reasons why the technology has not been widely adopted by society. The amount of energy-intensive computing processes it takes to secure transactions, mine Bitcoins, and prevent fraud, are just too high for most people in our current world. Some estimates have placed the carbon footprint of Bitcoin mining on par with the entire country of Sri Lanka.
But there is hope on the horizon. Ethereum has launched a major update to both save the environment and grow. This new proof-of-stake mechanism replaces energy-intensive computing processes with more sustainable methods that should quell environmental concerns while allowing for the continued expansion of Ethereum.
Newly developed layers of blockchain technology also have the potential to revolutionize financial markets all over the world by creating fully digital and automated assets. With this, decentralized exchanges and derivatives trading will be possible without traditional intermediaries, such as stock exchanges or banks.
Businesses Are Beginning To See Its Value
Grayscale Investments is on the move. The US cryptocurrency asset manager recently hit a major milestone for institutional investors and landed Guggenheim Partners, an investment firm with over 275 billion dollars in assets, as yet another client to invest up to 530 million into Bitcoin via Grayscale.
And in his years as CEO of BlackRock, the world’s largest investment funds manager Rick Rieder has seen the world’s financial markets change before him. He knows that cryptos will have a place in our future and is confident it isn’t going anywhere soon.
Why You Should Be Wary
There are, again, three main reasons why consumers should be wary of a crypto bubble pop: investors always overhyping new technology, that there’s almost no barrier for entry, and that the currency succumbs to the whim of emotions.
Overhyping New Technologies
Blockchain technology is hyped as the future of finance and commerce, but investors may be overestimating how quickly it will be adopted in enterprises. A decade after its introduction into industry use cases, blockchain has not translated to meaningful enterprise usage.
Yes, businesses are beginning to adopt cryptocurrency now (as my above post proved). However, many are still not ready to compromise their more traditional financial systems just yet. The crypto market may take some more time before maturing, just as any new tech does – remember how long it took 5G to become a reality?
No Entry Barrier
A whole new economic era is now being born on the internet, and there are no barriers to entry. Just about anyone who has time to code can create a blockchain and should be able to launch their own tethered token in this volatile environment. So far, there’s been an incredible number of potential competitors for Bitcoin, Dogecoin, and Ethereum (with CoinMarketCap having listed over 11,000 cryptocurrencies), with more likely coming soon.
The barrier-less system means that practically any entrepreneur or developer could potentially enter into cryptocurrency markets as competition increases exponentially. And they won’t have to worry too much about whether what they’re creating will compete successfully against existing coins.
Driven By Emotions
Crypto’s lack of correlation with other asset classes makes it difficult to predict what might happen in any given market on a short-term basis. For example, the US Dollar is tied to gold. When one is up, the other is down. But cryptocurrencies have no such correlations and thus are subject to rising and falling based on emotions.
For example, Elon Musk’s interest in Bitcoin is a bit confusing. He first bought $1.5 billion worth of Bitcoins in February and then, later on, said he would no longer accept them because they have negative environmental impacts. Now it appears that his interests shifted to Dogecoin instead, which caused a 20% bitcoin crash.
Tweets with little substance hold power to erase hundreds of billions of dollars worth of cryptocurrency, in all fairness, don’t really inspire confidence in the future of the technology.
Many people are wondering if the cryptocurrency bubble is going to pop. If you’re one of them, here are some reasons why it won’t happen anytime soon.
While crypto technology is still maturing and has a long way to go before reaching its full potential, businesses have already begun recognizing how valuable this new form of digital money can be for their business models in the future.
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That being said, there’s no harm in taking precautions against becoming overly excited about new technologies that could potentially over-promise and under-deliver by doing your own research on whether they’re worth investing in or not!
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