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Why The Bursting Of The Bitcoin Bubble Will Be Good For The Sector

Updated on December 6, 2017

Why you don't need to be afraid of a Bitcoin bubble bursting

Now that Bitcoin is gaining much more media coverage because of its meteoric rise to surpass the $10,000 mark in value, it has predictably resulted in the idea it and the cryptocurrency market in general, is in a bubble.

While I have no trouble accepting the fact there will eventually be a popping of that bubble, and it'll probably happen in 2018, I do have a problem with some of the pundits and "experts" acting in some ways as if this is something out of the ordinary for any new asset class.

Not only are bubbles bursting historically identifiable, they all have repeated themselves, performing as any new asset will when more people and institutions start to take an interest in it after the early adopter stage is over. That time has already come and gone as hedge funds start to pour billions into the blockchain and cryptocurrency sector.

Lesson in recent history on bubbles bursting

Most of us are aware of the last two bubbles that burst. There was the Internet bubble at the turn of the century, and the real estate bubble that triggered the Great Recession.

What's interesting about the real estate bubble is the mindset that developed among those that started using their homes as a piggy bank. The idea that the purpose of your home had changed from being something to live in to a way of accessing capital, was what brought everything crashing down.

The reason behind it was the irrational boost in the value of the homes, which owners than borrowed against by refinancing them. Easy access to cash and consumer-friendly credit terms provided the impetus for the collapse of housing.
In the case of the Internet bubble, that is closer to what we're seeing unfold in the cryptocurrency sector, as the introduction of new coins or tokens are exploding in number, and the increase in the value of Bitcoin soars at a very rapid pace.

Whether it's a traditional sector like the housing market, or a new sector at the time time, like the Internet, the underlying reasons for them reaching bubble proportions are the same: irrational exuberance. The same is taking place with Bitcoin and other cryptocurrencies, without the understanding of what differentiates the various coins, and how the blockchain in general will change the world in the years ahead.

In other words, it's a market driven by emotion and desire to make a quick fortune. That never ends good for most speculators that aren't aware of what the underlying fundamentals are.

Is 2018 the year the bubble will burst?

Why I see there being a bubble forming and it eventually bursting in 2018 is the same reasons the Internet bubble burst: investors really don't know who the winners and losers will be. Most don't know the why of the value of one cryptocurrency being greater than another, yet they are pouring their money into them.

The escalation of the number of new cryptocurrencies coming to market makes it impossible to even count them, and that means it's also impossible to analyze most of them. The speculation fever that has gripped the crypto market because of the rapidly rising value of Bitcoin, has encouraged others to get a cryptocurrency to market quickly in hopes it'll attract investment that will drive up the price of the coin.

What is happening under that scenario is a lot of scams and meaningless cryptocurrencies are being created that have no built-in demand; they aren't developed for the purpose of serving some type of need or want. All of those will be purged when the bubble finally does burst. That is a good thing for the sector.

What I find fascinating about this, and why I think there'll be two bubbles with Bitcoin and cryptocurrencies, is this is all happening in the early stages of the second phase of the development of the asset class. Almost all the time it's when the masses get involved that the price of something gets driven up to unsustainable heights that the intrinsic value of the asset can't justify.

Seeing a bubble forming at this stage means there will be a second bubble in the future. We don't have to be concerned about that yet, but it will come down the road.

What's driving the sector up now are those that think they're missing out on the chance to garner a fortune. This sense of urgency is bypassing due diligence and setting us up for the bubble.

We need to understand that we're still in the early stages of the second phase of the growth of the sector, and the best is yet to come. We haven't missed the potential inherent in the future growth of cryptocurrencies and the overall blockchain.

Some have missed the benefits of the early stage growth, but there is plenty left to generate significant returns if we're patient.

Out of the ashes

Most cryptocurrencies are junk and will fail. The thing to look for is whether or not it is meeting a specific market demand. The quality of the code is also important to ensure protection against hacking. If any crypto meets those standards, and a network of decent size grows around it, there is a good chance it can make it.

There will be a big cryptocurrency bubble bursting in the near future, probably no later than mid-2018. The good news is those cryptocurrencies that survive will explode in value.

We're at the stage where the cryptocurrency market is getting far too crowded. For that reason the formation of a bubble and it bursting will be very good for the sector.

What will emerge out of the ashes will be the real foundation for the future sustainable and long-term growth of the industry. Those are the cryptocurrencies and companies that will produce fortunes for many people, or at least significant returns.

This will set up the environment for the masses to come on board. When that happens we'll see extraordinary growth in value for Bitcoin and the surviving legitimate cryptocurrencies. The companies built to serve the market will have taken shape by that time, and they'll be extremely attractive as holdings, and will be driven up by the overall growth of the blockchain.

Some of those companies are already here in the form or exchanges and cryptocurrency mining companies, but many traditional financial institutions are rapidly looking at ways to enter the industry, and eventually, once the volatility of Bitcoin and other cryptocurrencies settle down, it'll be accepted as a form of payment by most if not all retailers.

Since most people understand retail, that may be the final trigger that causes the explosion in value that will likely make today's pace seem tame in comparison.

Another catalyst could be the embracing of Bitcoin in particular as the preferred currency by people in a country where monetary policy and corruption have eroded the value of their national currency.

With a growing number of governments not able to meet their promises and unfunded liabilities, they'll start looking for alternative ways to raise capital. Bank accounts and pensions are the probable places they'll go to first. One way to protect against decapitalization is to use Bitcoin or another cryptocurrency as a store of value and means of conducting business.

Conclusion

Since there is so much volatility among cryptocurrencies, including Bitcoin, it would seem taking a long-term view of holding onto a position is counterintuitive.

That isn't the case. The key is to be in it for the long haul. Those are the people that will make a lot of money. That takes some courage when the volatility challenges our underlying thesis for investing in a coin or company in the first place.

That's why due diligence is vital to success. I don't see any problem with Bitcoin in that regard, although it wouldn't surprise me to see it take a big, temporary hit. This is normal for any new asset class, and even some old ones.

After all, if a 20 percent to 30 percent drop is a correction for Bitcoin, what will it look like when the bubble bursts?

There will be those that panic. I hope you're not one of them. To sell in a panic is going to cause a lot of people to lose money in the present, and miss out on the full potential that lies in the future.

Keep in mind, specific Internet companies failed when the bubble burst, but I think we can safely say the Internet itself is here to stay. It will be the same with quality cryptocurrencies and the companies built to serve in that market.

Back to my original point. Why should anybody consider cryptocurrencies and the blockchain any different than any new asset class that has emerged in the past. We shouldn't.

Those that understand this and hold on during the tough times, will make far more money than the early adopters that did the same in the very earliest days of Bitcoin.

I'm convinced the best is yet to come in the market, and we have the chance of a lifetime to build generational wealth. As with any investment, we need to dig in and resist the temptation to trade, rather than invest for the long term.

Short term investing leading up to the bubble isn't a bad idea. We can take the profits and run. But those that put aside some cash in anticipation of the crash and wait to see what cryptocurrencies and companies survive and/or emerge, will do far better than their investors with a short-term horizon.

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