According to economic definitions, a rapid escalation in asset prices ensued by a subsequent contraction is known as a “Bubble.” It comes after irrational, exuberant speculation shoots an asset’s prices high above what anyone would value it at. As a result, investors stop purchasing the asset, leading to a quick, massive sell-off.
Since mid-October 2017 where its value stood at just below $6,000, the price went on to surge to just over $19,000 in the following months, and then eventually dropped back to $8,000 within a similar time frame. What would anyone call that?
Contrary to common perception, “Bubbles” are not a new occurrence and have in fact been in existence for about the same time as large trade systems.
Back in the 1600s, for instance, a massive tulip bubble almost brought down the entire Dutch economy. More recently, there was the dotcom bubble in the late 1990s, where individuals scrambled to own shares in nearly any internet firm available.
Now, there is the apparent “Bitcoin bubble.”
Although the recent behavior of the Bitcoin market is the most documented, Bitcoin is surprisingly just one of the many cryptocurrencies whose “bubble” is near popping.
Soon after the market cap of Bitcoin hit an $830 billion high in January, the combined value of all cryptocurrencies took a toll—falling to $276 billion in February, a low otherwise only experienced back in 2017.
Is the Bubble Popping? And Is It a Good Thing?
Now that this “bubble pop” seems inevitable, the question is whether it is a bad thing.
According to Ivan Goldensohn, CMO of blockchain firm Dispatch Labs, it is not. Various reports pinpoint ICOs (Initial Coin Offerings) as the main perpetrators in the creation and consequent popping of the bubble. In 2017, CoinSchedule documented 235 new ICOs.
Nevertheless, Goldensohn claims that there exists a huge gap in the ICO realm between cryptocurrencies’ speculative value and the actual utilization of the networks or services represented by those cryptocurrencies.
Even some few months after debuting, just one out of 10 ICOs has a real product platform.
The rest are usually held and subsequently traded as possible products to be sold someday in the precise ecosystems they were initially purposed to find use in.
Undeniably, even where an ICO product starts out, there is no surety that the ecosystem through which it operates in is healthy.
While ICOs have predominantly earned applause as the solution to fundraising challenges, incorporation of cryptocurrency may not necessarily solve many of the technological issues.
Simply launching ICOs does not necessarily mean creating a viable product which generates actual value and integrates token circulation in its platform.
This is not to say that ICOs must be tied to products which are already producing value at the time they make their way to the market.
Among the perks of supporting new ventures is the chance to partner with a great thing before everyone else realizes its greatness.
Regardless of their position in the enactment process, good ideas are valuable, and ICOs represent one of the channels of helping such ideas towards reality.
Why the Bubble Needs to Pop
If the bubble bursts, those “capable” products which can gain massively from the usage of ICOs in their respective platforms will no longer be forced to compete as much in markets riding on speculation.
Moreover, bubbles need to pop to allow the society to steer forward. For instance, Marc Hochstein recently highlighted that although the aforementioned dotcom bubble lost fortunes and involved numerous firms, it also permanently and sincerely altered the technological landscape. It set up the internet infrastructure which facilitated the rise of most now-valued online firms.
Some experts also argue that this crypto bubble is stifling innovation since useful ideas tend to disappear in the midst of the splashy Bitcoin prices splurging news.
And blockchain, for instance, is one of the more valuable insights with a potential to inspire many more.
Beyond the Bubble
After the popping of this bubble, the digital currency world turns into one where both valuable ideas and money become closely tied models as opposed to typical vague associates.
The Bitcoin bubble pop will also result in a leaner, more robust Bitcoin world that utilizes a leaner, healthier protocol which further promotes innovation.