Over the first half of 2017, we watched the cryptocurrency market reach all-time highs. Experts predicted this cryptocurrency bubble would pop – and sure enough, here we are!
Many of the new cryptocurrency investors feel like they are watching the Titanic crash into the ocean. Just how far did the cryptocurrency market crash? The Bitcoin price dropped to a price it hadn’t seen since, well…
The end of May.
A quick glance at the charts shows that this is true for the price of Ethereum as well. While the recent performance of the market has disappointed many who have just recently invested, the cryptocurrency market is still up substantially this year.
In the big picture, the current performance of cryptocurrency could be more appropriately compared to passing over a rough tidal wave rather than a sinking ship.
While the recent performance of the cryptocurrency market is no need to panic, it does provide a good opportunity to explore the idea of economic bubbles and what might happen in a speculation crash.
A Billionaire on the Bubble
Billionaire entrepreneur Mark Cuban caught a lot of slack for calling out the Bitcoin bubble in early June 2017:
I think it’s in a bubble. I just don’t know when or how much it corrects. When everyone is bragging about how easy they are making $=bubble https://t.co/hTrV5DeWNd
— Mark Cuban (@mcuban) June 6, 2017
Although Cuban (correctly) called the cryptocurrency bubble, Cuban doesn’t consider himself an opponent to the sector (he has invested himself). His grievances with cryptocurrency were with the valuation of the market, not the long-term value of the blockchain technology.
I think blockchain is very valuable and will be at the core of most transactions in the future. Healthcare, finance etc all will use it https://t.co/VfMEc9LkqR
— Mark Cuban (@mcuban) June 6, 2017
This isn’t the first speculative bubble that Cuban has seen. He made much of his early fortunate through the dot-com boom, selling his Internet radio website shortly before the dot-com bubble collapsed.
Cryptocurrency bubble vs. Dot-com bubble
The cryptocurrency bubble is often compared with the dot-com bubble of the late ’90s and very early ’00s. With the introduction of the Internet into households around the world, the stock market surged as anybody who wanted could purchase a dot-com domain and start their own global business.
What do you think of the following statements below?
- “The growth of the cryptocurrency market was sparked by the advent of blockchain technology and then the profitable performance of Bitcoin in the early 2010’s.”
- “An unprecedented amount of personal investing occurred during the boom, and the press reported the phenomenon of people quitting their jobs to engage in full-time day trading.”
- “It’s possible for a promising coin to become a public company via an initial coin offering (ICO) and raise a substantial amount of money even before making a profit.”
- “The price of Bitcoin rose in value by 2,619%, and 12 other coins each rose over 1,000%.”
Any of the statements above seem like something you could read on any cryptocurrency news site. However, all of the statements above are adapted (or kept as-is) from the Wikipedia entry on the Dot-com bubble.
It’s pretty easy to see that the similarities are striking.
What would happen in a doomsday situation where the cryptocurrency bubble completely pops?
DURING 2000–2002, THE BUBBLE COLLAPSED. SOME COMPANIES, SUCH AS PETS.COM AND WEBVAN, FAILED COMPLETELY AND SHUT DOWN. OTHERS, SUCH AS CISCO, WHOSE STOCK DECLINED BY 86%, AND QUALCOMM, LOST A LARGE PORTION OF THEIR MARKET CAPITALIZATION BUT SURVIVED, AND SOME COMPANIES, SUCH AS EBAY AND AMAZON.COM, LATER RECOVERED AND SURPASSED THEIR DOT-COM-BUBBLE STOCK PRICE PEAKS. – DOT-COM BUBBLE, WIKIPEDIA
We would likely see similar outcomes in the event of a catastrophic cryptocurrency crash. Some coins would disappear overnight, leaving coin-holders with nothing. Other coins would suffer setbacks before stabilizing into their own niche. Finally, in spite of the bubble crash, a small handful coins will continue to shoot for the moon – reaching valuations that we can still only imagine.
What should I do about the cryptocurrency bubble?
This seems like the perfect spot to insert “I am not an investment advisor” disclaimer. Although the cryptocurrency bubble and dot-com bubble show many similarities, we can only offer general investment advice about how to trade cryptocurrency in today’s market.
Here are a few basic investment suggestions:
- Never trade with more money than you are willing to lose. Yes, it’s still possible to become a Bitcoin millionaire. With that being said, it’s still possible to lose millions as well. There’s no guarantee to prevent any one of your coins from hitting $0.
- Diversify your portfolio to reduce risk. As mentioned above, even if many coins were to completely collapse, there will still be other coins which are resilient through difficult times and even grow. Invest in many types of cryptocurrencies – those with different use cases or technologies – to smooth out the risk of a total loss.
- Consider “buying low” if you are bullish long-term investment. A popular investment strategy is to buy low and sell high. If you are a firm believer in a specific coin and feel confident in your personal research, you may find that this is an ideal time to buy additional coins while the price is low. Can you imagine buying Amazon at its post-Dotcom-crash price of $7 a share?
What do you think? Have we reached the bottom of the cryptocurrency market crash? When will we see a recovery – and just how high might the value of Bitcoin and other coins eventually go?