A cryptocurrency bubble or a speculative bubble in cryptocurrencies is an economic phenomenon whereby a large increase in prices is eventually followed by a massive drop. With Bitcoin, there was a giant bubble in 2017 which burst afterwards.
In economics and finance, the term “bubble” is used to refer to an economic cycle of a rapid increase in price followed by a contraction. They are usually the result of investors bidding on a certain financial instrument, beyond its intrinsic value, creating enthusiasm in the market. This may result in an increase in price, which deters investors from buying the particular asset, “causing a massive sell-off and the deflation of the ‘bubble.’”
As the Financial Times wrote, in August last year, “In January, the total market capitalisation of cryptocurrencies had climbed beyond $800bn, up from just $18bn a year earlier according to data provider CoinMarketCap. Now the market has lost three-quarters of its value to stand at $200bn.”
According to Paul Krugman, writing in the New York Times, “Early investors in a bubble make a lot of money as new investors are drawn in, and those profits pull in even more people. The process can go on for years before something…simply exhaustion of the pool of potential marks — brings the party to a sudden, painful end.”
Bloomberg however, points out that bubbles happen, that does not mean that cryptocurrencies do not recover. They do.
The bitcoin bubble—its rise and fall—was not due to an external factor such as “a competitor — the main alternative cryptocurrencies had even bigger price declines. Nor have regulators cracked down on Bitcoin — in fact, the regulatory structure has generally been quite accommodating to the technology. Nor have critical technological flaws emerged — yes, the Bitcoin network has become congested, but this problem was anticipated well before the crash.”
According to Bloomberg’s view, “Bitcoin’s spectacular rise and fall was due not to rational optimism followed by sensible pessimism, but to some kind of aggregate market irrationality — a combination of herd behavior, cynical speculation and the entry into the market of a large number of new, poorly informed investors.”
In the end of the day, bubbles happen and it is hard to predict them. The biggest of them all is of course the 2000s housing bubble or the 1990s dot-com bubble. As the Bloomberg article notes, “if something looks too good to be true, it usually is.”