Academy Author ◦ 11 Jul 2023 ◦ 11 min read

Recognizing Crypto Bubbles

Recognizing Crypto Bubbles

From the very beginning, people called cryptocurrencies assets soap bubbles. Bitcoin and other cryptocurrencies were called bubbles for the following reasons: firstly, cryptocurrencies could not be used to buy everyday things, secondly, cryptocurrencies were isolated in programmer communities, and thirdly, no one could invest in them. Therefore, people early concluded that cryptocurrencies do not have value.

Are the critics right? Is crypto a scam? In this text, we will discuss the reasons why this point of view exists and analyze the most common claims against cryptocurrencies and evaluate the degree of their reliability.

What Is A Market Bubble?

A market bubble is an investment or economic cycle in which asset prices quickly go beyond the healthy market value and, due to the volatile behavior of the market, subsequently decline in price, often by double-digit interest points.

There are many historical examples of market bubbles that investors and economists should explore. For example, Japan's "bubble economy" in the 1980s, the stock market dot-com bubble in the late 1990s, the US housing bubble in 2009, and the Chinese stock market bubble in 2015. But right now, the most widely discussed potential market bubbles include the US stock market, the housing market in China, and the cryptocurrency market.

Since market bubbles have such sharp first-order effects and unpredictable second-order and third-order results, investors must make an effort to understand what a market bubble is.

Cryptocurrency Bubble Idea

The rapid growth of cryptocurrencies has created a problem. These new assets, which many investors did not fully understand, exceeded the market capitalization of Fortune 500 companies and generated profits of thousands of percentage points. This happened several times. For example, in the early days of December 2017, Bitcoin reached a price of $19,000 and a market capitalization of more than $300 billion, and by April 2021 the value of Bitcoin hit $60,000 (ATH) and it reached a market capitalization of $1 trillion. As a result of these excessively high valuations, markets turned ruthlessly at such short intervals, and cryptocurrency bubbles burst.

However, the collapse of the crypto market at the beginning of 2018 was purely for speculative reasons, and in the spring of 2021, it collapsed due to the Fed's policy aimed at reducing the interest rate and excessive use of borrowed funds. Both cases were serious examples of what happens when market bubbles and cryptocurrency market bubbles burst.

Statement 1: Cryptocurrencies are a scam because they are not secured by anything

This "lack of support" argument is one of the most popular theses of crypto critics. One of the reasons for this popularity of the take is that this is generally true: cryptocurrencies, for the most part, are not supported 1:1 by any fiat currency or physical assets, such as gold or silver. Instead, cryptocurrencies are supported by the confidence of people in them.

It is believed that Bitcoin does not need to be supported by anything due to its unique qualities as money: its scarcity and immutability. These are the key characteristics of cryptocurrency that allow it to "work" without collateral, say, 1:1 gold.

What's the difference, is bitcoin supported by something physical? The US dollar has long moved away from the gold standard, so why do people still use this argument about cryptocurrencies?

Often this comes down to what people define as the value of cryptocurrency.

The term "value" we use here has two meanings. In the first case, it can describe the desired thing or service for which someone is ready to pay money, and in the second case, the word can be used in the financial sense - the cost of something, estimated in monetary units. This second meaning may explain why Bitcoin's supporters see its advantage over fiat currency.

Bitcoin's decentralized way of working, unlike the fiat currency system, is one of the reasons cryptocurrency supporters believe that it will serve better as money

Let's now see how fiat currencies withstand the same criticism in their direction.

All the fiat currencies, even the most influential of them like the US dollar, experience regular fluctuations in value year after year. According to data provided by Finbold, the real value of the US dollar over the past 50 years has decreased six times. In 1972, the value of one dollar was $1, but by 2022 it had decreased to $0.14. Thus, despite the support of the world government, one of the strongest currencies in the world has depreciated over time.

Do not be surprised by the price of cryptocurrencies being so unstable. When there is good news, such as more proliferation or institutional investment, prices rise. But when bad news appears, such as hacks or scams, prices fall.

Thus, if cryptocurrencies are not secured by anything physical or any government, this does not mean that they have no value.

Statement 2: Cryptocurrencies are a scam because they are used for illegal activities

This statement is also popular, but it is not entirely true. Cryptocurrencies can be used for illegal activities, such as money laundering or drug trafficking, this is true, but is this not true for all currencies on earth?

Still, this is not the only thing for which cryptocurrencies are used. They are also used for legal activities, whether buying coffee or investing in future projects.

The reason for the popularity of this statement is that it is sensationalized and there are many published articles with the headlines like "Cryptocurrencies are used in drug trafficking!"

But fiat currencies are also used for illegal activities, primarily the US dollar. Recently, on Chainalysis data for 2021 were given, which read: in the offline world, $800 billion to $2 trillion of fiat currency is laundered annually. For comparison, laundering accounted for only 0.05% of all cryptocurrency transactions in 2021.

The key point here is that the entire narrative of "cryptocurrency is a scam" is promoted by media companies, as this gives them more traffic. A recent report by Similarweb colorfully shows topics such as "investing in cryptocurrency" or "how to invest in cryptocurrency?" collect significantly fewer views compared to negative phrases such as "crypto is a scam" or "cryptocurrency is fraud."

Statement 3: Cryptocurrencies are a scam because they are too volatile

This statement is partly true. Cryptocurrencies are unstable, and this can be both good and bad - depending on your point of view.

Some believe that volatility is good because it carries the potential for high profits. Others consider volatility a bad phenomenon, as it carries with it the possibility of large losses.

One way or another, volatility itself does not mean that cryptocurrencies are fraud.

Investors in stocks and bonds also have to deal with volatility. As in the case of cryptocurrencies, the volatility of stocks and bonds can be both a good and a bad factor.

So, if we want to say that cryptocurrencies are fraud because they are too volatile, then we must also say that stocks and bonds are also fraud.

Statement 4: Cryptocurrencies are a fraud because they are not regulated

Again, this statement makes sense, but only partly. Cryptocurrencies are not regulated by governments on a wide scale, like fiat currencies. But this does not mean that they are not regulated at all.

For the most part, cryptocurrencies are regulated by a program code in which everything that can and cannot be done with them is recorded. And this code is open to everyone.

Although cryptocurrencies are not controlled by most world states, they are still somehow regulated.

Statement 5: Cryptocurrencies are a scam because this market is a bubble

In this statement, as you guessed, there is also a certain degree of truth. Like many trends in the world of technology, cryptocurrencies show signs of a bubble that will one day eventually burst.

But again, that doesn't mean they are scams. In financial markets, bubbles are constantly emerging. For example, there was a dot-com bubble in the late 1990s and a real estate bubble in the early 2000s. But when they burst, not all the websites turned out to be useless, and not all housing is worthless now.

Same with cryptocurrencies. Some will survive and thrive. Or here is another argument against bubble lovers: even the historical minimum of Bitcoin's price during today's recession trades much higher than it was during the last crypto-winter.

Crypto Bubbles Vs. Stock Bubbles

The cryptocurrency bubble is similar to a bubble in the stock market, where asset prices and market valuations rise sharply and fall sharply. Since cryptocurrency markets, as you know, are unstable, there were several cases of the collapse of the cryptocurrency bubble (shown in the table below).

So Cryptocurrency Is a Bubble?

Supporters and investors in Bitcoin point to its usefulness as a currency, a good place to store cash, protect against inflation, and as a means of saving that is better than gold. These four value propositions are well-founded as an investment thesis.

But what justifies Bitcoin's price and does it show signs of collapse? A cryptocurrency bubble is when the price of a cryptocurrency exceeds its fair market value. However, as the real economy continues to decline and inflation rises rapidly, Bitcoin's value remains relevant and even strengthens.

However, Bitcoin is still not on the balance sheet of many companies, it is not used to buy and sell everyday consumer goods and is not a transaction mechanism (due to cost). Some even argue that it will never become a means of exchange and a real defense against inflation.

This is the current status of the debate around cryptocurrencies and whether they will necessarily become the next bubble. This is a debate around the true value of cryptocurrencies, for example, Bitcoin.

However, in March 2020, when the stock market collapsed by 35%, Bitcoin fell by 55%, and after the stock market recovered, Bitcoin's price was far ahead of the stock market. If consumers continue to spend, interest rates remain low, and incomes remain high, then Bitcoin will rise. But if interest rates rise, peak profits will be achieved, and economic growth will slow down, then a correction may occur. But fundamental indicators do not suggest that a large crypto bubble will arise shortly.

It is worth noting the fact that there is a lot of false information - and this information is rippling from everywhere: news feeds and television programs, bloggers, and cappers, but let's discuss the facts:


"Cryptocurrency takes power from centralized systems and transfers it to the hands of legitimate owners - ordinary people!," - Mark Zuckerberg, American programmer and founder of the world's largest social network Facebook (currently Meta).

Cryptocurrency brought to our world the decentralization of assets - a "cool thing," if you express yourself in the slang of the early 2000s, which leads many banks to horror. What's the scary thing here? A decentralized network is supported by a huge number of independent users (nodes) and is not managed by a small, fixed number of people, unlike centralized fiat assets. Such funds cannot be "frozen" by someone's decision and are managed exclusively by the owner. There are also blockchains in cryptocurrency, based on which many tokens of various projects are placed and at certain points, they become "hostages" of their ecosystems.

Capitalization and Popularity

At the time of writing this article, the market capitalization of the total "pyramid" is $2,038,541,896,455, and the daily turnover is $101,470,578,729. Not bad, right? Understanding the growing "trend" large companies and banks began to come to the market. Many investors in stock exchanges, observing volatility indicators and the results of various IDOs/ICOs, redirect part of their income to crypto exchanges. Take simple examples: Adidas earned $22,500,000 selling its NFT (and why not?), Mastercard and Visa soon plan to add support for cryptocurrency payments (is it already difficult to talk about the conspiracy of alien market makers?), and then Elon Musk constantly adds oil to the fire. Cryptocurrencies have been classified as trends for a couple of years, and any trend is a variant of an additional income line that cannot be ignored. Well, it is worth noting that this trend turned out to be a fairly promising direction.

Cryptocurrency - Official Means Of Payment

A convincing fact of the importance and necessity of cryptocurrencies is their massive legalization in many economically leading countries. According to information for 2022, cryptocurrency can be used for payments in countries such as Germany, Switzerland, the USA, El Salvador, Japan, Canada, and Australia.

In addition, many people began to use cryptocurrencies as the main savings asset, arguing that in this way they want to protect their savings from inflation. Remember how in 2010, US programmer Laszlo Hanich bought two pizzas for bitcoins? Now for 1 BTC, you can buy not only two pizzas but also the whole floor of a pizza store (and maybe the entire store). Such an increase in quotes demonstrates the interest of people and now you can increasingly often hear: "Cryptocurrencies are the gold of the digital age."

Technological Effectiveness

Since Bitcoin "made a hype," it would seem that very little time has passed, but technology has already managed to take many big steps forward. Overall time, teams of crypto enthusiasts have developed many blockchains. Their struggle for leadership led to the fact that, in addition to all well-known exchange quotes, cryptocurrencies began to be introduced into the metaverse, games, various applications, and cold and decentralized wallets. People who kept their savings somewhere in a distant dark box because of distrust of everything happening in the world of cryptocurrency began to confidently buy fixed-price coins - stablecoins, which are dollars in digital form.


The most significant conclusion (at the same time the advantage of crypto) is the ability to own your money independently. Ordinary network users have a daily passive income and an extra reason to feel a little atmosphere from the movie "Wolf of Wall Street." When deciding to try what it is like, remember that investment requires knowledge (which is available on the Internet), a lack of fear of a "bubble" and caution so as not to fall for fraudsters who promise "golden mountains."

However, do not forget those cryptocurrencies today are speculative investments, and under no circumstances should you invest more than you can afford to lose. Use the same approach that is necessary to handle shares and other types of investments.

Cryptocurrencies are unstable: prices can fall at any time. And since they are not regulated by governments to the same extent as the stock market, if you lose your money, often you will not be able to return it. If you decided to collect a portfolio of cryptocurrencies, of course, your risk appetite is already very high. Nevertheless, only the fact that risks exist does not automatically make the whole world of cryptocurrency a fraud.