BITCOIN, Is it a BUBBLE or NOT? We got the answer!
Today I want to talk with you about Economic Bubbles:how to correctly interpret them and when it is a right moment to buy. Will consider the main phases of such market and the differences between them.
Strange though this might sound, the BTC chart is ideal for considering these cases. We will start from the April 2017 when the Bitcoin’s price reached $1000 - $1600 points. At that moment, the market was in a hidden phase and there were only smart people who entered the market, as they knew that the asset had good prospects for a growth. This phase can also be called as a “Change”.
This phase can also be called the phase of change. This phase is distinguished by some sort of specific information surge, discovery or a kind of innovation. In any case, this is a global change in a particular sector of the economy, as a result of which market participants begin to regard this sector as beneficial for investments. On the Bitcoin market, these were the times when cryptocurrencies were only gaining momentum and then smart money were being attracted by the fact that currencies could be backed up not only with gold and oil, shares of some companies, but also, so to speak, by codes defined by the limited combinations of characters in the code. And so the first strong money began to come to Bitcoin.
This is followed by an awareness phase that attracts institutional money utilizing its growing popularity. After the shift prices begin to grow gradually. This is not a speculative growth, since growth is most often determined by the improvement of high quality in a certain area of the economy, in our case - the field of cryptocurrency. And knowing that other crypto-assets can be acquired for BTC, BTC grows first. But, as prices rise, more market players pay attention to this, which leads to the next growth phase, discussed by us.
The rise of prices is not a sufficient condition for the emergence of a bubble. For any financial tremble fuel is needed. Without it speculations on a larger scale are impossible. The lack of accessibility does not allow new members to connect to the sector.
Accessibility becomes the entry ticket for everyone wishing to enter the game. For example, a steady increase of the BTC price was predicted, a person can simply invest all of one's free money in a given currency and wait until the price doubles. But during this period, markets like Bitmex and Bitfinex are beginning to gain popularity, and this is trade with a shoulder to lean on which allows to purchase more than a person can afford. That was firstly; secondly, mining becomes more accessible. A person does not just buy and wait, but he also procures BTC. This is an opportunity to get more BTC than a person could afford if he simply bought currency with free money.
In turn, accessibility is the result of certain financial innovations, which are often developed specifically for new market conditions.
As a result of availability, the market begins to warm up. Trade in debt stimulates the growth of sales, and here the shortage of the subject of sales begins to affect the market. Prices are growing faster, resulting in fertile ground for quick profits. With the connection of an increasing number of new players, prices are completely out of control. Any long-term forecasting becomes impossible. Rising prices provoke all stupid, greedy, and desperate to connect to the game. As fire constantly requires fuel, so the bubble constantly needs an influx of new victims.
Then the bubble enters its most dramatic phase. This phase can be called the phase of Mania. Some sober analysts say that the process cannot continue like this. They present arguments based on experience, long-term research and logic. But the arguments of a few sensible people are lost due to the fact that prices continue to rise. Skeptics are destroyed by the arguments of charlatans, who preach that the world has changed, and that in the new world there must be new prices.
The world, of course, is changing daily, but this does not mean that prices should be out of control. But another day passes, and the charlatans once again benefit. During this period, they launch their most cruel lies into society — when prices reach their new long-term level, their growth will smoothly stop. The idea of a smooth stop is reassuring, and many contributors which were attracted from the outside find themselves in a trap. Of course, they realize that prices cannot rise forever, however they choose to act on the basis of such an outcome. For a while everything goes without a hint of tragedy. Those who have not entered the game face a terrible dilemma. On the one hand, they understand all the risks, but on the other hand they realize that they might miss a fantastic opportunity. Every day they hear incredible success stories from their friends and acquaintances, and not many manage to resist the temptation. The rest jump into the pool and eventually go bankrupt.
Every person prefers the belief in the best outcome, and the bubble cynically uses it. He demands unconditional faith from his victims, and it is faith that he feeds on. But while the euphoria involves more and more new participants, regular market players who have been doing business in this industry for a long time are becoming aware of how unreliable this creation actually is. They lose their faith and begin to quietly panic. In the end, they decide to withdraw their money. Usually, the old players in this market try to stay unnoticed whilst they plot their escape, and most often they do succeed. But regardless of whether random participants notice the departure of the main participants or not - the withdrawal of money by regular participants is the beginning of the end.
The causes of the explosion can be different, but sooner or later the bubble pops. Sometimes widespread panic, which spread from old players to the new ones, can be the detonator. Sometimes it takes the form of a change in credit policy, or even new information. But euphoria is always replaced by panic. Everyone suddenly realizes that the building is engulfed in flames and rush to the exit. Everyone is trying to sell, but there are no buyers. Panic is growing, prices are falling uncontrollably, credit money flows are drying up, and the counter of losses is finally turned on.
Strange though this might sound, the BTC chart is ideal for considering these cases. We will start from the April 2017 when the Bitcoin’s price reached $1000 - $1600 points. At that moment, the market was in a hidden phase and there were only smart people who entered the market, as they knew that the asset had good prospects for a growth. This phase can also be called as a “Change”.
This phase can also be called the phase of change. This phase is distinguished by some sort of specific information surge, discovery or a kind of innovation. In any case, this is a global change in a particular sector of the economy, as a result of which market participants begin to regard this sector as beneficial for investments. On the Bitcoin market, these were the times when cryptocurrencies were only gaining momentum and then smart money were being attracted by the fact that currencies could be backed up not only with gold and oil, shares of some companies, but also, so to speak, by codes defined by the limited combinations of characters in the code. And so the first strong money began to come to Bitcoin.
This is followed by an awareness phase that attracts institutional money utilizing its growing popularity. After the shift prices begin to grow gradually. This is not a speculative growth, since growth is most often determined by the improvement of high quality in a certain area of the economy, in our case - the field of cryptocurrency. And knowing that other crypto-assets can be acquired for BTC, BTC grows first. But, as prices rise, more market players pay attention to this, which leads to the next growth phase, discussed by us.
The rise of prices is not a sufficient condition for the emergence of a bubble. For any financial tremble fuel is needed. Without it speculations on a larger scale are impossible. The lack of accessibility does not allow new members to connect to the sector.
Accessibility becomes the entry ticket for everyone wishing to enter the game. For example, a steady increase of the BTC price was predicted, a person can simply invest all of one's free money in a given currency and wait until the price doubles. But during this period, markets like Bitmex and Bitfinex are beginning to gain popularity, and this is trade with a shoulder to lean on which allows to purchase more than a person can afford. That was firstly; secondly, mining becomes more accessible. A person does not just buy and wait, but he also procures BTC. This is an opportunity to get more BTC than a person could afford if he simply bought currency with free money.
In turn, accessibility is the result of certain financial innovations, which are often developed specifically for new market conditions.
As a result of availability, the market begins to warm up. Trade in debt stimulates the growth of sales, and here the shortage of the subject of sales begins to affect the market. Prices are growing faster, resulting in fertile ground for quick profits. With the connection of an increasing number of new players, prices are completely out of control. Any long-term forecasting becomes impossible. Rising prices provoke all stupid, greedy, and desperate to connect to the game. As fire constantly requires fuel, so the bubble constantly needs an influx of new victims.
Then the bubble enters its most dramatic phase. This phase can be called the phase of Mania. Some sober analysts say that the process cannot continue like this. They present arguments based on experience, long-term research and logic. But the arguments of a few sensible people are lost due to the fact that prices continue to rise. Skeptics are destroyed by the arguments of charlatans, who preach that the world has changed, and that in the new world there must be new prices.
The world, of course, is changing daily, but this does not mean that prices should be out of control. But another day passes, and the charlatans once again benefit. During this period, they launch their most cruel lies into society — when prices reach their new long-term level, their growth will smoothly stop. The idea of a smooth stop is reassuring, and many contributors which were attracted from the outside find themselves in a trap. Of course, they realize that prices cannot rise forever, however they choose to act on the basis of such an outcome. For a while everything goes without a hint of tragedy. Those who have not entered the game face a terrible dilemma. On the one hand, they understand all the risks, but on the other hand they realize that they might miss a fantastic opportunity. Every day they hear incredible success stories from their friends and acquaintances, and not many manage to resist the temptation. The rest jump into the pool and eventually go bankrupt.
Every person prefers the belief in the best outcome, and the bubble cynically uses it. He demands unconditional faith from his victims, and it is faith that he feeds on. But while the euphoria involves more and more new participants, regular market players who have been doing business in this industry for a long time are becoming aware of how unreliable this creation actually is. They lose their faith and begin to quietly panic. In the end, they decide to withdraw their money. Usually, the old players in this market try to stay unnoticed whilst they plot their escape, and most often they do succeed. But regardless of whether random participants notice the departure of the main participants or not - the withdrawal of money by regular participants is the beginning of the end.
The causes of the explosion can be different, but sooner or later the bubble pops. Sometimes widespread panic, which spread from old players to the new ones, can be the detonator. Sometimes it takes the form of a change in credit policy, or even new information. But euphoria is always replaced by panic. Everyone suddenly realizes that the building is engulfed in flames and rush to the exit. Everyone is trying to sell, but there are no buyers. Panic is growing, prices are falling uncontrollably, credit money flows are drying up, and the counter of losses is finally turned on.
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Email:
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By Mark Faber's definition mini-mania is a speculative bubble, the crash of which does not lead to large-scale economic consequences. After a quick and short mass sale, the upward trend is re-established. However paradoxically it may sound, it’s not so easy to provide a definition for a bubble. I perceive it as a much more difficult affair than to define the prerequisites for its emergence. Early attempts at a definition of a bubble are basically remarks describing it as a sharp rise in prices, which implies a speculative moment.
For example, Kindleberger defines a bubble as “a substantial increase in prices, followed by a crash". These definitions give us space to classify market behavior, if we go a tiny bit back in time and remember how the development of this theory began, we may recall that such a definition as hyperinflation was derived. Hyperinflation was formally defined as a rise in prices by 50% per month for the duration of at least three months. This made it possible to work with historical data - to classify certain episodes of price increases as hyperinflation. But such a definition is insufficient: during hyperinflation, the behavior of traders changes, who are trying to get rid of money as quickly as possible, which leads to a sharp increase in the speed of the circulation of finances. On the other hand, when its quantitative boundary was determined, they tried to grab the exact level, beyond which changes occur in the behavior of economic agents. In other words, a definition that looks purely technical may contain a tactical moment.
Similarly with the bubble. A formal definition (depth of the decline in prices) should roughly capture the level that indicates a phenomenon of a drastically different kind. It is possible that such thoughts on how to diagnose a bubble retroactively have some theoretical value, but, unfortunately, they provide little in terms of practical value. It is clear that diagnosing the presence of a bubble before it bursts and not after would be the most productive outcome.
In my opinion, a good indicator of the presence of a bubble is a sharp (non-linear) rise in prices for a short time or an accelerated growth rate of the price of an asset. Call it the first sign of a bubble. This criterion is easier to apply than the criterion of the inconsistency of price in comparison with fundamental values. The fact that the fundamental value does not change, and the prices grow, is much easier to see than to understand what this fundamental value is. In other words, it is easier to understand that the dynamic is sketchy, rather than assessing the correctness of the absolute level. However, we see that the bubbles are masked by the fact that for some time they create an appropriate economic situation.
That is the reason why bubbles are dangerous, but now, I hope you have at least a fundamental understanding of how to realise that you are in a bubble. At least, we can determine the phase of the Mania in which we will be ready to close our long position and make a profit.
The paradox also lies in the fact that knowing how dangerous the combination of accessibility, high prices and euphoria is, people repeatedly allow themselves to be drawn into various bubbles. It is not necessary to scrupulously study the works of Minsky in order to make out the signs of a bubble. It is enough just to trace how for the duration of the last few months, Bitcoin, having passed the bubble of the end of 2017, entered the bubble in the middle of 2019. The current prices for bitcoin are greatly inflated. Everyone understands that this will lead to a collapse. This may happen tomorrow or in a couple of years, but one thing we know for certain — the longer the bubble inflates, the more painful will be the consequences.