It's called different names—fluctuation, market adjustment, trading peak and so on. But after the dot-com and housing market bubbles, that's the term the media has latched onto. The meteoric rise in value of some types of cryptocurrency has many convinced the industry is in a bubble. In this article, we'll look at the arguments for and against that assumption. For simplicity's sake, we'll be looking at the so-called “Bitcoin bubble”—but similar trends have been affecting other digital currencies, too.
First, what's a bubble in this context? As Investopedia puts it, it's “a surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive sell-off occurs.” In plain English, what it boils down to is the market interest—and therefore, value—of a commodity rising very quickly, at an almost alarming rate. As the old saying goes, what goes up must come down, and when a bubble bursts, the value of the commodity it represents drops sharply. The results of such a burst can represent a market crash in miniature—and this can be financially devastating to those invested.
At its heart, the Bitcoin bubble—if it is really is one—is easy to explain. Initially, word-of-mouth circulated that it was something to look into, and investor interest increased. The media got a hold of the trend and gave it a lot of attention; this resulted in very heavy investment, driving its value higher. The Slant noted in a recent article that “buying Bitcoins just because Bitcoin prices are soaring is the very definition of speculation and bubble behavior.”
We'd like to throw in one caveat here before proceeding. Cryptocurrency is a new industry—really only about five years old—and everyone involved in it is learning as they go. Over that short period of time, there's been a roller-coaster effect on digital currency value. A theft occurs? Shaken investors sell off their cryptocurrency and the price falls. A major media outlet gives it positive attention? More investors jump in and drive the value upward. Daily Finance offers this nugget of wisdom: “The interest in new currencies will take awhile to die down, especially as they swing in price to their actual value.” As is the case with most investing, it's wise not to let short-term bounces create panic, but to take more of a long-term look—though we understand that can be difficult to do with a new type of investment.
Bitcoin addresses this subject specifically on their FAQ page. To no one's surprise, they assure their current and potential investors that their currency is not in a bubble. In no uncertain terms, they say the following: “Choices based on individual human action by hundreds of thousands of market participants is the cause for Bitcoin's price to fluctuate as the market seeks price discovery.” Forbes Magazine recently took a look at the Bitcoin bubble, and even though the article is titled, “Yes, Of Course Bitcoin Is Showing Bubble Behavior,” that title can be a little misleading when it comes to the article's actual content. The takeaway from that article can be summed up in one of its opening sentences: “...please do note that the existence of a bubble is not evidence that Bitcoin will either fail or succeed.”
People look at market bubbles in the past, and yes, some of them were almost catastrophic. Here is where we'd like to channel the spirit of Douglas Adams and recommend the following to cryptocurrency investors: Don't Panic. Yes, the value of your digital currency is bound to rise and fall as people check it out, and react to media coverage. Sometimes these fluctuations are going to be dramatic. But we'd like to note that Chicken Little reactions to market fluctuations are neither wise nor productive. Even if there is a digital currency bubble taking place—and that depends solely on who you talk to—it doesn't mark the end of the world. We'd like to wrap up with another quote from the Forbes article we cited earlier: “There are often bubbles in things that succeed, just as much as the rubble of a bubble shows a failure.” [Emphasis is ours.]