The word “bubble” has been tossed around regarding the cryptocurrency world, but what does it mean?
First, we must clarify the “financial bubble” concept (also known as economic or speculative bubble): It is the phenomenon the financial markets produce when there is some speculation, and is characterized by an extended, unusual and unrestrained rise in an asset value. It becomes more appealing to new investors, mostly the inexperienced ones, who eventually are looking to profit from sales in the short and middle term.
The process is a continuous rising spiral that moves further away from the reality, toward ridiculously high levels, until the “bubble” bursts and unchains a massive sell-off and, with few buyers available, the price drops below the purchase value, which often causes serious economic troubles for inexperienced investors.
During the so-called “bubbles”, prices often waver chaotically and become impossible to forecast based only on supply and demand. These problems are hard to notice at first sight, and more often than not are identified in hindsight.
This is something negative for the market, since investors usually sell in a panic mood, producing serious economic inbalance.
Having said that, it makes sense classify cryptocurrencies like a similar financial occurrence. Late last year, for instance, Bitcoin almost reached the $20.000 USD mark after it began 2017 bellow $1,000 per coin.
As expected, the flagship digital currency plunged soon after, causing investors to sell at a low price, often below their original investment.
However, there are many reasons why digital assets are far from suffering the ravages of the financial bubbles the way we know them:
- Unlike other assets, digital ones have a growing acceptance, not only by users, but by governments and financial regulators worldwide. On Apr. 2017, Japan announced it will start accepting Bitcoin as a legal form of payment.
- Another example is the Philippines, where citizens use Bitcoin to send or receive low-cost remittances, which is why the national bank announced on Feb. 2017 it would regulate Bitcoin so it could be used as an official system. Other countries like Australia, Russia and Mexico are in the process of adopting similar measures.
- The growing number of businesses worldwide accepting cryptocurrencies as a form of payment for products and services will increase the regular and stable demand of the digital coin.
- Another reason is that cryptocurrencies have become a rescue instrument for countries in financial troubles.
- Cryptocurrencies are backed by its users, since supply and demand does not allow them to disappear from the market.
- Digital assest have become very valuable, partly because they have a limited supply, and the supply of new digital coins is slowing down.
The digital financial market is still in its early stages, and the debate whether it is a financial “bubble” will surely continue for quite some time, but for now we are certain that a well-defined cryptocurrency must be supported.
It is always necessary to consider that, before entering the world of digital economy, we must inquire if these assets are backed by a serious project and they are not a scam. It is essential to verify the credentials of the company we want to invest in, and accredit its support.
In the end, this may be the difference between profits and losses.
By Ana Gasca