And Is It About To Burst?
If you have been following cryptocurrency this year, you probably witnessed the overall market cap go from 15 billion dollars to an astounding 199 billion. Just like you, many people are wondering if cryptocurrency is in a bubble and if it is, is it about to burst? To answer that question, we first need to determine where does a bubble start, and how much it can inflate.
To affirm that we are indeed in a bubble, we first need to identify where the bubble begins. Cryptocurrency is something so new that we can't compare it to anything else that we have seen. If we take a look at the stock market, for example, we can evaluate approximately how much a company is worth by considering certain characteristics such as the company's revenue, assets, cash flow, etc. In cryptoeconomics, this practice is impossible mainly because the price per coin is determined purely by speculation, without strong underlying fundamentals (yet). On top of that, a lack of regulation and possible government intervention makes cryptocurrency an international free-for- all marketplace, where wild price movements are an everyday experience.
If we compare the current cryptocurrency market capitalization to the one of the dot-com bubble at the beginning of the 2000s, we can quickly realize how insignificant our market cap is compared to it. For those who don't know, the dot- com bubble at the beginning of the century had a 3 trillion dollar valuation, which was almost 20 times bigger than the current cryptocurrency market cap (~199B). In fact, the potential size of a crypto bubble would be significantly larger than any previous one because, for the first time, we are witnessing the creation of an international market with no barriers to entry (contrary to a national stock market). On top of this, the blockchain is such a promising and disruptive technology that will undoubtedly leave its mark in the industry, and this time you can be part of it.
But will this trend continue in the future?
If you are a beginner to cryptocurrency, you might not understand how prices are established. But in simple terms, the moving forces behind cryptocurrency prices are mainly tech releases, software updates, mainstream adoption, and any other event that would tend to play a role in the present or future demands. At this moment, prices are mainly based on future expectations and utility. But considering that the real value of cryptocurrency will reach its natural levels once it starts being largely adopted, we could affirm that, until then, prices will be more speculative.
In summary, it is healthy to assume that we are witnessing the formation of a cryptocurrency bubble and that it most probably is in its early stages. But if we compare it to past events such as the dot-com bubble there is still a lot of room for growth.