Is there a cryptocurrency bubble building in 2017 and by when will it burst?
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ryptocurrency Market Capitalisation Shooting Up
In the last month, we saw an enormous rise in the market capitalisation of cryptocurrencies - which is the calculatory book value of crypto units x current price. The rise was particularly pronounced for Ethereum (ETH), Ripple, and Bitcoin. Is this value for "real"?
Financial Bubbles
Financial bubbles are a heaviliy researched subject. Ever since Nobel laureate Vernon Smith demonstrated in a replicable laboratory experiment how oversupply of credit will reliably produce stock exchange bubbles, our understanding has improved rapidly.
Current estimates that about 90% of bubbles can be attributed to this one reason, rooted in flawed government policy, failed centralist monetary, credit or tax policy measures, last observed in the Financial Crisis of 2007. A second reason is overconfidence in a high-potential, but hard-to-understand new technology, at the peak of its initial hype cycle, as during the Dot-com Bubble of 2000 of 2000 to 2001.
Bitcoint, the First Cryptocurrency
Cryptocurrency are a digital asset class created (in most cases) by a decentralized blockchain. Invented by the pseudonomous Satoshi Nakamoto, the first Blockchain, Bitcoin, reached an early peak late 2013, when it rose from a market capitization of 2bn USD to 15bn USD in less than 3 months. Followed by a rapid crash to 10bn (2/3) and a slow decline the following 2 years.
The Rise of New Cryptocurrencies
Since 2016 a new boom has been emerging steadily, while the "Bitcoin dominance" went down with accelerating spead in favor of a more diverse currency universe.
While one could argue this diversification leads to more stability, the application of cryptocurrency is still an open question. Are they more than a speculative asset? Or will the current boom eventually burst because there is simply no buyer left?
Subsequent Expectations
Even if a major downward correction of the broader cryptocurrency market capitalisation were to take place, if may well be that subsequently one (or more) successful cryptocurrencies re-emerge.