When is the Cryptomarket Overhyped?
Cryptos are hyped again and again. Some experts and self-appointed experts even call it a giant bubble. But what is true and how can you recognize the timing of a cycle?
Are Cryptos Overvalued?
Of course, nobody can truly answer this question. No human being can really know how the market is constituted and how it will behave in the future. Surely, one might be able to see a tendency and I am myself someone who is 100% convinced of a bright future for cryptos in general. But nobody knows what's next week. Whoever pretends to know and doesn't have already billions in his account I can't take seriously.
But I have collated some arguments why cryptos could be in a bubble or why they couldn't. Everybody might find his own justified decisions regarding his own money.
First, the arguments against a bubble:
Cryptos are, Generally Speaking, a Good Investment
Bitcoin and many cryptos are designed deflationary even if the number of different coins are inflationary. That means the supply of most coins is limited and the creation of new coins (so-called mining) becomes more and more difficult and more and more expensive. The demand, on the other hand, gets pushed up by various factors. Many connoisseur of the technology and the concept are convinced long-term investors.
Added to this, there are many short-term speculators. Even though many of them are initially driven by greed for money they often become believing investors. Also, many seek refuge in the safe crypto-haven facing the disastrous situation of the fiat money economy. As well as gold, cryptos profit by the decay of the traditional currencies' value.
For many people worldwide, crypto also serves as a vehicle for sending money without government repression. And lastly, the demand is also stimulated by more and more dealers that accept Bitcoin as payment. Even though these are only a few and not the main factor as it should be.
All these factors justify that cryptos are at least increasing in value. But we could argue well about what is actually a justified rate of growth.
Periodic Dips Test the Substance
Whoever is already invested in cryptos for a longer time will have noticed that every few months there is a drop of the crypto prices. In traditional asset classes these drops of 30-50% could be deadly. But in the crypto market it is nothing unusual. It is even very healthy! Because every time the price drops it reveals who is committed.
Gamblers will be flushed out of the market and only the true believers stay strong and are still trusting in their investments. But since the so-called dips are only temporary and followed by a recovery, it demonstrates that the majority of market participants are convinced of the substance of cryptos.
If it had be a bubble those dips would be like a deep stitch with a needle. A bubble would burst immediately.
Now, let's look at the arguments for a bubble:
Too Tiny Dips during an Immense Surge
The surge during the some weeks was quite enormous even for crypto conditions. Even the big player Bitcoin can make 400% in a few days. And yes, there were also some dips in between. But these were so ridiculously minor that they have been equalized immediately by new investors entering the market.
A test for substance could really take place. In fact, the chart still looks in the end of a cycle exponentially even though this means nothing because the crypto chart looks like this for a while then. With every new peak the scale hast to be adjusted so that the older peaks don't even look so exponential anymore.
And I don't want to claim a short-term exponential growth couldn't take place in a free market of growing technology. Also in nature one can see especially in growing processes very strong increases. And how should the cryptos grow quick enough to finally get rid of the criminal fiat money system? 1-2% per year?
Good luck, because this wouldn't be even enough to compensate for the inflation in fiat money. And yes, it often looks very similar to older times. But I don't accept this as an argument. First, I am not a fan of inductive reasoning and the situation is totally different than in the past.
Bitcoin becomes more and more mainstream what gives it more substance and justification. But yes, we should always remember times like 2013 or 2017. Nowadays, potential black swans appear nearly daily.
The recent surge exceeds once again all expectations and brought us to crazy heights.
In my beginner's guide you will learn everything you need to know about cryptos!
People Don't Know What They Do
This is not intended to sound arrogant, but it is an inevitable fact. When one looks at the recent surge of the crypto market and then additionally assumes that the majority of new investors are in the market for the first time then one question arises:
How much have these people already learnt about the market and the underlying blockchain technology? In the old days, there were only nerds which have educated themselves on nerd website about the nerd topic of "cryptos".
Today all mainstream media outlets many fake news or just bad researched articles. Only a minority has really exposed themselves to the libertarian philosophy and history behind cryptos. The only things that even the bad journalists get is that there is an enormous surge and therefore enormous profit potential.
Or in plain English: Quick and easy money, who can resist this temptation? And unfortunately, cryptos currently don't have the same amount of adaption as means of payment which would be actually able to justify the whole thing.
Free Market in an Unfree World?
So far, I have emphasized that the crypto market is a free market - that means it is also often manipulated. In principal that is true since no government alone in the world can really stop it. They can only make it difficult or try to go into competition and they surely will do so. But as such cryptos are the first authentic market money in a long time.
But now I must relativize a little. The real-life world is unfortunately not a free market. Central banks can expand the money supply as they wish. Karl Marx couldn't have envisioned it better. And yes, this doomed money actually helps cryptos.
But still, the fact that central bank can generate bubbles can be harmful for the crypto market. If the new created money of central banks only pumps up the prices of real estate, stocks and soccer players it would be fine. But if this money pours into the crypto market it might result in an overheating of demand.
A Possible Scenario
And of course, I still believe that all fiat money bubbles will burst first and the cryptos (at least some of them) will come out as winners. But until then it can happen that a high appears in the crypto sphere which quickly gets destroyed again.
That's why I say: Yes, cryptos have a glorious future ahead. But I don't whether we will stumble over one or another peak in the meanwhile. Therefore, I warn you to be cautious. To minimize the risk, think about a cost-average effect by saving some cryptos daily. But this is not an investment advice!
Read more about crypto currencies and three non-monetary reasons for their success.
What do you think? Are we already in a bubble? Or will we see more gains? Please write your justified opinion down below in the comments!