The Cryptocurrency Bubble

If we had to choose the hottest asset class in the whole financial markets without a doubt we would choose cryptocurrencies, starting with their leader, Bitcoin and others that are acquiring a lot of popularity recently, like Ethereum.

The rest of the world markets, like bonds, Wall Street, the Asian or European stock markets, etcetera, seem like a walk in the park when compared with the frenzy of the cryptocurrency world, which are trading in a frenetic way the last years.

This increasing prices and interest is what we call a financial bubble.

The interest in cryptocurrencies rises not year after year, but month after month, which is reflected in the prices of the main assets.

However, contrary to previous bubbles like the tulip mania, the South Sea or the Nasdaq bubbles, the interest in cryptocurrencies is genuinely global and by the retail traders of all around the World who have easy access to the financial markets nowadays.

Are we in a cryptocurrency bubble, yes or not?

Just by seeing the charts of the most popular cryptocurrencies we should note that they are being bought frantically by an ever bigger number of investors worldwide.

The charts tell us that we are in a bubble, without a doubt.

bitcoin bubble 2017
The Queen of the Cryptocurrencies
Ethereum bubble
Ethereum is very popular nowadays

buy Litecoin bubble

When you get assets rising 1,000% in one or two years you know it is not a “normal market”, although there seems to be not normal markets anymore, at least in Wall Street, but that is another story.

You can have some penny stocks rising this way but not assets such as Bitcoin.

A couple of years ago I wrote an article about investing in Bitcoin (in Spanish) in which I gave my opinion that despite being a market in which you could win a lot of money in the short-term, the possibility of becoming rich had gone already.

In those moments, the Bitcoin market had lost 80% of its value and people though that the crash of that bubble had arrived. Nonetheless, Bitcoin had multiplied its value by more than 100 in just a few years. It seemed like a bubble already.

The logic told me that the end of that bubble could not be that far away.

Well, that time I got somehow wrong.


Somehow because I still believe that the opportunity to become rich doing trading or investing with Bitcoin is gone.

That is to say, those who bought at 1, 5 or 10 dollars had a great chance to become rich, especially if the held until now and sold at 4,500 dollars.

Surprisingly enough, that article I wrote signalled the end of that bear market in Bitcoin, since it was trading at 250 dollars.

If I had bought that day I could have multiplied my investment by 19 in just more than two years.

10,000 dollars would be 190,000 today.

An excellent trade, for sure.

This is one good example that the best moments to buy or sell are when the rest of the people is pessimistic.

Anyhow, the story is not yet ended.

What would you do if you had bought Bitcoin at 500 dollars and today it was quoting at 4,800?

Would you sell?

Well, here the problem lies in the fact that the majority of investors would not sell because they trust their discernment.

This is the problem with these assets that people will clinch to them until it is too late.

I say this because I believe that eventually this cryptocurrency bubble will end up bursting as all bubbles did in history.

Beginning, intermediate or ending part of the bubble?

Some days ago I read an article in Forbes in which the author said that cryptocurrencies are effectively a bubble; however that bubble had still a long way to go.

One of the arguments was that the capitalization of the cryptocurrencies world was similar to that of McDonald’s which meant that there was still room for much more action.

It seems that with a capitalization of just more than 100 billion dollars, the criptocurrency bubble is far from being close to markets like the S&P500 with a capitalization of more than 20 tillions. In other words, more than 200 times that of the criptocurrencies.

If we have a look to the history of the great bubbles, we can see that some of them provoked a huge increase in the capitalization of their markets, like the case of the Nasdaq in the nineties.

If we look at this issue that way it seems that we are in the middle stages of the bubble.

Let us say that despite the regulations and prohibitions, like the last in China with Bitcoin, the criptocurrency market still attracts many investors all around the world, in such a way that its capitalizacion goes from 120 billion to 2 or 20 trillions.

In such a case it would not be a surprise if other smaller criptocurrencies would rise dramatically in a similar way to that of Nasdaq penny stocks during the 90s.

The strongest cryptocurrency would have less margin to rise, obviously.

How much can the criptocurrencies rise before collapsing?

Well, there is something clear.

Independently of the fact that the cryptocurrency model is good, which is clear is that it cannot rise forever.

That is to say we should not expect this market to rise a 300% annually all the time.

Some day this amazing bull market will stop.

Perhaps it is still a long distance until that and we are just in the middle of an epic bubble.

In that case it would make sense to buy some of the smaller cryptocurrencies, which would be equivalent to the penny stocks of the dot com bubble, many of which multiplied by more than 100 its value in those years.

I do not deny that there is probably still a possibility of making money there.

In the case of Bitcoin or Ethereum, I do not see so much potential as the “penny stocks”, although they could probably rise by a lot more the coming years. In this case I would probably prefer to do speculative trading with them, especially with Bitcoin, more liquid and with better conditions for trading.

Doing trading we will not make as much money as if we just buy the assets and let them run. However, in the case of a crash we would be able to get out of Bitcoin or Ethereum in time, with not so big losses. We just need to have a good stop loss order.

The investors that use the strategy of buy and hold with these assets do not have the trouble of trading every day, with the loss in commissions and costs associated, but they are taking more long-term risks.

This would not be bad if you are someone who bought in 100 or 200 dollars, for example.

However if one day you buy Bitcoin at 30,000 dollars, three years later, with the asset quoting at 80,000, it starts to fall in a dramatic way to 5 or 2,000 dollars, it is sure you would end up selling with a great loss.

This is just a speculation but do not think it is much farther from the truth.


I do not know.

This world of cryptocurrencies is very hot.

As for the point of view of trading I do not have a doubt.

We are in a bull market and I would be trading the bull side in any case.

With respect to the idea of buying Bitcoin and getting rich, that is something more difficult to do.

There are more chances to go rich if we are able to do or offer any product related with Bitcoin since it is so trendy.

I think that is a better way to try to get rich with cryptocurrencies than by trading them.

This thing of so many cryptocurrencies ICO’s lately reminds me of the IPOs parties of late 90s in California, in the middle of the Nasdaq bubble.

There were plenty of parties celebrating the new millionaires.

The same as with many of those IPOs I can see a lot of pain in the future for many crypto investors.

We will se what the future brings.

Meanwhile we just enjoy the criptocurrency bubble.