Boom and Bust
Over the years, there have been many cycles of boom and bust in financial markets in the U.S. The stock market as a whole, of course, has had more than its share of ups and downs. Though the infamous Wall Street crash of 1929 looms large, one doesn’t have to look any further back than the financial crisis of 2007–08 for a contemporary example. In addition, certain segments within our financial sector have also plummeted, remembering in particular the “dot.com” crash of March 10th, 2000. The housing market hasn’t been immune either. In December 30, 2008, the Case–Shiller home price index reported the largest price drop in its history. Commodities are not immune either. The price of gold rose 7-fold during a 12-year bull market, hitting its all-time peak of over $1900 in 2011, only to fall precipitously during a wild selling spree in 2013. And, of course, we can’t forget “Silver Thursday”, causing the Hunt Brothers to lose over a billion dollars and eventually declare bankruptcy as the price of silver fell through the floor. Need a more humorous example? Think Beanie Babies! Even fiat currency can go boom and bust. Venezuela, for instance, had the strongest economy in South America from the 1950s until the early 80s. Now it suffers from an inflation rate of nearly 60%! The value of the currencies of Iran and Argentina are also in free-fall. Is the crypto space on the verge of repeating this same tragic pattern? What can you do to protect your cryptocurrency investments?
Why Does It Happen?
Some say that boom and bust cycles are inevitable in any capitalist system, and history seems to support that conclusion. Since the end of WW II, here have been twelve major boom and bust cycles in the U.S. economy. Boom periods see huge economic growth, major improvements in employment numbers, wage growth, an increase in actual wealth, and high returns on investment. Bust periods see economic shrinkage, an increase in unemployment, and widespread investment losses.
Why isn’t there simply slow and steady economic growth? Wouldn’t that be a better approach? Greed is probably the primary reason. Banks profit from lending. When the economy is booming, banks drop their interest rates and loosen lending requirements in order to take advantage of mushrooming economic growth. However, greed can lead to over-investment, where investments are risky or even reckless, or oversupply outstrips demand. The economy becomes overheated, and eventually the bust cycle begins.
Is Cryptocurrency on the Verge of a Bust Cycle?
The value of bitcoin has increased dramatically over time, then fell off its all-time high to lose a great deal of its value. Is cryptocurrency in the throes of a bust cycle?
Bitcoin was issued in July of 2010 at an initial price of 8 cents per coin. However, the price increased 900% in just five days. During the first few months of 2011, bitcoin reached parity with the US dollar, selling at $1.00 per coin. However, the price quickly exploded, and it reached $31 by July of that same year. However, by December, the value of one bitcoin dropped precipitously, and eventually bottomed out at just $2. The price of bitcoin rose fairly steadily after that, with occasional dips, reaching $1000 in January of 2017, and $5000 in September of 2017. Though bitcoin reached an all-time high of $19,783.06 on December 17th of 2017, on December 22nd it lost one-third of its value in 24 hours. It then lost another 50% of its value over 16 days around the beginning of February, 2018.
So one might say that the history of bitcoin reflects the typical boom and bust cycle that we’ve described earlier. But then again, maybe not.
Dr. Vikram Mansharamani, a lecturer at the Harvard John A. Paulson School of Engineering and Applied Sciences, wrote an article in March of 2017 titled “Bitcoin: Boom or Bust”. In it, he evaluated bitcoin along five salient dimensions or “lenses” as he called them: trading volume, financial leverage, market psychology, politics, and its total potential market. He gave bitcoin a score of 1.5 out of 5, concluding that this cryptocurrency was not a bubble on the verge of bursting, though he did suggest that this could change in the future.
Interestingly, when Dr. Mansharamani wrote this article, the price of bitcoin hovered around $1200. If you were to point to the fact that bitcoin subsequently reached a high of nearly $20,000, you could easily conclude that the bitcoin bubble had burst. However, if you realize that the price of bitcoin today is around $6,700, or five-and-a-half times the value of bitcoin when the article was written, you might conclude that the value of bitcoin has increased nicely since then.
Is Cryptocurrency Different?
Crypto expert and partner at Atlas Neue, Cassus Kiani, said that the bitcoin price will go “way beyond” $20,000 in 2018 due to the global adoption of blockchain technology, an emerging mainstream attitude towards cryptocurrency, and increased amounts of Initial Coin Offerings (ICO). This suggests that, despite the peaks and troughs we’ve seen over time with the price of bitcoin, its value will continue to trend upwards for the foreseeable future.
Mati Greenspan, Senior Market Analyst at eToro, is also bullish on bitcoin. He believes that bitcoin is going through the classic tech adoption curve associated with emerging technologies. Remember, cryptocurrency is a very new phenomenon, and it will undoubtedly take some time before it becomes generally accepted by the public, not to mention by the world markets. He believes that if India were to legalize cryptocurrency, that would tip the balance in its favor for the foreseeable future.
Vikram Mansharamani talks about the huge untapped market of potential cryptocurrency investors as a major factor in his optimism about this market’s future. He also says that with a current capitalization of only around $20 billion, the current market is miniscule compared to what it could be in the future.
One invaluable feature of cryptocurrency is the power of smart contracts, which Mansharamani suggests will create an “unprecedented demand for digital currencies” over time. For these and other reasons, he states that “while short-term price corrections are always possible, there are compelling reasons to believe the long-term outlook for blockchain-enabled currencies like bitcoin is bright.”
What Should People Do?
“Diversify your portfolio as much as you can and think long-term.” That is the refrain that is often touted as the best way to succeed in any financial market. However, it’s also important to recognize that there are no guarantees. For this reason, it is essential that you educate yourself as much as possible so you can be better prepared for any eventuality.