The blockchain may be here to stay, but that doesn't mean the present crypto market isn't circling the drain
Blockchain technology is either a revolutionary and disruptive breakthrough, or an useless marketing phrase reflecting an overhyped notion, depending on who you ask. Whatever your thoughts are on the underlying technology, you can't dispute that blockchain-based assets such as cryptocurrencies—and, more lately, non-fungible tokens (NFTs)—have grown in popularity. A single Bitcoin was once valued more than $68,000, and NFTs traded for millions of dollars.
However, cryptocurrency prices are the very definition of volatility; Bitcoin's value plummeted to under $35,000 in early 2022, and this was not the first time such a catastrophe occurred in the crypto market. This volatility has sparked a fair dose of skepticism since it renders Bitcoin and other cryptocurrencies useless for anything other than speculation. The concept that, unlike fiat money, Bitcoin was hard-limited—that there would only be a finite number of Bitcoins in the world—was part of its allure. However, cryptocoins may be split into new versions, and it is relatively simple to create a new crypto currency out of thin air. There are presently over 10,000 cryptocurrencies in circulation.
Many people are concerned that cryptocurrency is in a typical bubble. Previous bubbles, such as the housing bubble and the dot-com boom, have demonstrated that the only certainty about a bubble is that it will collapse. But, if you know where to look, economic bubbles follow certain pretty distinct stages, which means we can at least make a very educated estimate as to where we are with crypto—and where we're heading.
What exactly is a MARKET BUBBLE?
An economic bubble is a basic concept: it occurs when the price of something ceases to correspond to its true value. Back in the 1600s, the Dutch Republic's tulip bulb market was extremely insane, with single tulip bulbs selling for several times the ordinary person's annual salary. Prices climbed and rose, and many urgently bought their way in to avoid missing out—until the bubble burst, prices dropped, and many individuals were financially destroyed.
There are several types of bubbles for various things, such as stocks or real estate. A crypto bubble is a type of asset market bubble. However, regardless of the topic of the bubble, an economic bubble goes through five stages:
Displacement. This is also known as "disruption," and it occurs when a fresh concept or product catches the interest of investors. The blockchain and cryptocurrencies are both fascinating new discoveries, and when Bitcoin initially appeared in 2009, it was a very novel notion that drew attention.
Boom. Following a period of gradual growth, the price begins to rapidly rise as knowledge spreads. Instead of a small group of sophisticated investors, the product becomes the mainstream and receives a lot of media attention. People hurry to join in on this hot new venture, driving up prices even further.
Euphoria. Prices reach absurdly high heights, but no one seems to mind since there appears to be an inexhaustible supply of "greater fools" prepared to pay to get in.
Profit-taking. Some investors get concerned about the value and begin cautiously eyeing the exits. Others will follow suit if they begin to sell or cut their stakes in order to mitigate risk.
Panic. The whales' cashing out is seen by everyone, and a race to the bottom starts. Prices plummet, and as they do, customers become increasingly frantic to sell out before losing everything.
Cryptocurrency Bubble or Shakeout?
Anyone following cryptocurrency will be familiar with the definition of a financial bubble. Defenders believe that cryptocurrencies are subject to repeated shakeouts that cause them to lose value and subsequently recoup it, frequently exceeding earlier valuations. Economist Tyler Cowen contends that the market is crowded with crypto assets, the majority of which will vanish as the novelty fades, but that core assets such as Bitcoin will remain. The dot-com bubble did not kill technological businesses or the Internet, and the failure of a huge number of social media sites does not imply that social media is no longer a reality.
But just because crypto and blockchain-based assets are going to stay doesn't mean they aren't now in a bubble. It's very evident that the value of many cryptocurrencies has been vastly overstated, given how ineffective they are as currencies or repositories of wealth (for example, the Shiba Inu crypto currency, which was created as a joke, was valued at $30 billion late last year). Furthermore, the NFT market is definitely being bolstered by "wash" trades, in which people buy their own NFTs to create the perception of value.
The recent drop in crypto values—and the absence of a quick recovery—indicates that we've entered the fourth stage, and profit-taking has begun. But there is one reason to believe that the crypto bubble will not burst: the cult-like environment that surrounds Bitcoin and other cryptocurrencies may save it. The hold-for-dear-life (HODL) and buy-the-dip crowd feel that these boom and bust cycles are natural and nothing to be concerned about—and their determination to hang on and rally around crypto may prevent a full-fledged panic.
No one can predict with precision when the crypto bubble will bust. Whether you have the guts to find out relies completely on your risk tolerance and capacity to deal with the toll cryptocurrency may have on your mental and emotional health.
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SOURCE: lifehacker
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