Cryptocurrency is known to be a great investment asset but it's also one of the biggest bubble ever. Here's everything you need to know about crypto bubble.

For decades, the stock market has been one of the greatest standout performers in the global financial industry. That is, until cryptocurrency was introduced a little over a decade ago. The appearance of Bitcoin, Ethereum, and other digital currencies apparently has started an entirely new revolutionary phenomenon that no one had expected before. The Bitcoin price, for instance, when created by Satoshi Nakamoto back in 2009 barely touched $1, but it has skyrocketed drastically to a new all-time high record at $68,000 last November.

Cryptocurrency bubble

The problem with the whole scenario is that it somehow feels too good to be true. For many years, economic and financial experts have been actively discussing their concerns regarding the risks of investing in cryptocurrency.

The crypto market is known to be extremely volatile, which can be seen from the drastic price fluctuations in the last few years. This continued to fuel the discussions of whether cryptocurrency represents real market opportunities or is it just a bubble ready to burst.

 

What is Crypto Bubble?

Like any other investment, cryptocurrency is also risky. In fact, there's no such thing as being 100% safe with this type of asset. Just like investing in stocks, forex, and commodities, investing in virtual currencies can also make you lose money if you're not careful.

Fully aware that cryptocurrency is highly volatile, many experts began to worry about the crypto bubble. Cryptocurrency bubble is usually indicated by prices experiencing higher spikes over time.

However, it is believed that the rise won't last forever and will be followed by a rapid decline in value, which can cause heavy losses for investors. The term "bubble" basically represents the rapidly declining price, which shows that the high value of the asset might "burst" or drop sharply at any time.

Typically, crypto bubble is associated with the FOMO (fear of missing out) phenomenon. Cryptocurrency is currently being the talk of the town these days, so naturally, everyone wants to join the fun and dig some fortune themselves. Such behavior can lead up to a bubble because money enters the market only to play catch-up and wait for a piece of action.

At one point when the price is still rising, many early investors would lock in their profits and sell their assets, causing the price to drop. Meanwhile, the newcomers would panic and probably start leaving the market as well.

When a bubble bursts in the stock market, usually the selling would stop when the shares slip well below the intrinsic value. This would look attractive to investors who didn't partake in the market froth. Cryptocurrency on the other hand has no intrinsic value. Thus, there's no telling when the selling will stop. The bubble might pop and the price might fall to an unpredictable level.

 

The Crypto Bubble Phenomenon in 2021

In April 2021, Bitcoin's price reached above $63,000 for the first time in history. While many celebrated the record-breaking moment, others were more skeptical and predicted that it was only a bubble that's going to burst soon. As a result, many crypto traders were deeply concerned about their investment, thus they decided to sell and take profit while they can.

By the end of May, the asset's price has plunged down to around $34,000, causing losses and panic almost everywhere in the world.

As if that's not enough, the price of altcoins also experienced more or less the same thing. Ethereum, the second-largest crypto in the world, lost at least 38.48% of its value in May, around the same time as Bitcoin.

Usually, a bubble would burst if the investors are selling their crypto assets at much higher prices. It is a pretty effective means to gain a large amount of profit when the crypto prices are high.

This is also what happened in the 2020 bubble phenomenon. However, we should note that this might not be the only factor in play. Fundamental aspects such as economic and political conditions are also important to consider. In this case, there are at least two other factors to consider, namely:

 

1. Elon Musk's Tweet

Elon Musk, the tech billionaire and CEO of Tesla, has been pretty vocal recently when it comes to cryptocurrency. He usually shares his opinions on his personal Twitter account. Generally, he's a big supporter of cryptocurrency and has mentioned that he believes in the future of crypto. In February, he successfully bought 1.5 billion Bitcoins as well as announced that his electric car company will start accepting Bitcoin as a method of payment.

However, about 49 days later, he changed his mind by tweeting that Tesla would no longer accept Bitcoin as a form of payment due to the harmful impact that it can cause on the environment. From then on, he began turning his attention more to Dogecoin.

Without a doubt, it's clear that Elon Must is an influential figure in the crypto world. Since he holds a lot of crypto in his hands, he gets more power to "move" the market, hence, people start listening to what he has to say. Musk's tweet against Bitcoin later caused the asset's price to plummet and wipe out hundreds of billions of dollars from the crypto market.

 

2. Not All Governments Support Crypto

The crypto bubble has come to light because some governments have not allowed digital currencies to undermine their central bank-backed currencies. Even though many countries, like Dubai, welcomes all those digital tokens, numerous do not agree.

Despite there are some country that allows crypto payment, some are opposed to it. One of the countries that strongly oppose cryptocurrency is China. Actually, the country has caused chaos in the crypto market by banning several banks and online payment providers in China from offering any service related to cryptocurrency.

Ironically, most Bitcoin mining practices take place in China.

Not only China, other countries like Turkey, Bolivia, Ecuador, Nigeria, and Algeria also has effectively banned digital currencies. This ban surely has affected crypto prices in general.

 

Is Now a Good Time to Invest?

Following the downfall of crypto prices in the first half of the year, the value of Bitcoin has managed to climb back up and made a new all-time high in November 2021. The price hit $68,327.99 – gaining about 3.37% in value from the previous high. That very same month, Ethereum also reached an all-time high by reaching $4,818.97 in value. However, there have been several fall-offs since then, including a decline in Bitcoin price to below $46,000 this month. Is this a sign of a crypto bubble?

If we look more closely, the recent mini-crash happened because of several factors. First, the uncertainty of the new Covid variant and high inflation, particularly in the US and UK, combined with the threats of further regulation on cryptocurrency in the upcoming future.

Generally, when an asset's price rises very quickly, the crash is more likely. It can be a strong bubble pop or just a correction when the price is down to a more "normal" level. This is what happens to Bitcoin right now.

If we talk about where the price will be heading next, the answer is not clear. When it comes to cryptocurrency, there are no guarantees of what might happen in the future. Considering the volatile nature of cryptocurrency, it's possible that the price will gain momentum at some point and continue climbing up.

However, we don't have a crystal ball to say that for sure. Some experts believe that the price will hit $100,000 before the end of the year, but some others suggested taking profit now while you still can.

 

Final Words

If you're a beginner crypto trader, it's highly important to be aware of the possibility of crypto bubble. Therefore, one thing to keep in mind while crypto trading is that you should expect the volatility to continue. Crypto is highly unstable that even something as simple as a tweet can change the dynamics in the whole Bitcoin market. This is why many experts suggest investing only 5% or less of your total portfolio in cryptocurrency.

And since the price can move very quickly, don't get easily intimidated by a sudden price drop. If you genuinely believe in the potential of digital currency, then you should just focus on your long-term goal.

More importantly, don't start purchasing more crypto just because the price is rising and everyone seems to be doing it. If you let your emotions control you too much, then you might sell at the wrong time or make a wrong decision along the way.

Lastly, it would be helpful to stay updated with the news in order to understand the market better and make better predictions of what might happen in the future. For convenience, you can choose a variety of crypto apps in an effort to get updated information on crypto news.