CryptoBubble or CryptoOpportunity?

This was originally posted as a post on LinkedIn, however, due to great interest and high importance as well as relevance, let us take a look at the matter once again.

Below are displayed two graphs. One shows the price of Bitcoin (in USD) as well as its market capitalisation, while the other one depicts Google searches for Bitcoin over time. Do you see the trend?

Even on separate graphs, we very well can see that Google searches tightly correlate with the price of the most popular (and valuable thus far) cryptocurrency. However, for the sake of this analysis and better representation, let’s take a look at the combined graph again.

What we see above is that search for Bitcoin vs. Bitcoin price is nearly 1:1. As I have noted earlier, this signifies that people essentially are doing very little analysis before committing to invest in this cryptocurrency. What it also shows is that this is very much driven by hype rather than sound analysis. How else could you explain the fact that the market cap of all cryptocurrencies has nearly doubled from a moderate drop since May this year.

Another import point – take a look how interest in Bitcoin varies by region. With an exception of Estonia, TOP5 countries the most interested in Bitcoin are all African countries. This is not without a reason.

Trouble with Bubbles

Getting back to the topic of this article, we must remember what do we define as a bubble.

A bubble is used to define a situation, driven by irrational expectations, that is isolated from reality and it is unlike to last. In financial markets and economics, bubble is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior.

So, where’s that Bubble?

Couple of things to bare in mind:

• The vast majority of cryptoinvestments are pure speculations. Some cryptos rise 10X in one day, and then drop to equivalent or even lower price. The possibility to get rich quickly generates the hype, which further increases the price.
• Irrational expectations work fine as long as the price of this asset class keeps rising. In case the market would become more volatile, or drop significantly in one day, many enthusiastic buyers might become scary sellers, and we all know where this can lead us.
• Due to decentralization, cryptocurrencies are being chosen as an alternative in countries with high inflation, little or limited access to capital markets as well as very little investment opportunities. However, here as well lies the biggest weakness of cryptos – due to various reasons, governments and regulators can interfere and try to ban or limit access to cryptomarkets.
• Finally, there is another thing called ICO (Initial Coin Offering). Little-known companies are raising millions of dollars for their ventures in cryptocurrencies, and this alternative type of funding has even passed VC investments this year. Since ICOs are usually happening in Bitcoin, Ethereum etc., this further raises the demand and inflates the price. The thing to have in mind here is that those projects (I’m not even calling them companies or start-ups) are usually very shady, hardly having any (potential) users, limited technology or experienced staff behind. However, ROI and super-positive expectations attract millions of traders/investors.

Bringing it all together

To sum up, we can quite confidently stress that if the thing we are seeing now is not a CryptoBubble, then it is CryptoHype for sure. Nevertheless, if it is a Bubble though, the sooner it will burst – the better, since so much can be learned and improved for the brighter tomorrow.

One thing I know for sure, and you should read it very carefully. Probably every time you are thinking about making some money from cryptos: do not invest more than you are willing to lose. And you will be just fine.

As for others, watch this very closely since more interesting things are coming soon.