Page Summary
A cryptocurrency bubble is a financial term for when the price of a cryptocurrency increases by a lot in a short timeframe and then collapses.
It starts with a sharp fall in price, after which opportunists see a good buying moment and drive the price up. The average investor is still confident then. Until the price falls again and panic selling takes over. Every investor then wants to get out because they are losing their money. When the cryptocurrency is almost worthless, even the opportunists don’t dare to buy anymore. The bubble has then burst. A bubble is only a bubble if this huge price drop is permanent.
Nobel Prize winners like Paul Krugman, Oliver Hart, and Joseph Stiglitz all called Bitcoin and other cryptocurrencies a bubble.
Examples of Bubbles
The Tulip Mania, the South Sea Company, the Great Depression, and the Dot-com crash are examples of economic bubbles.
The Tulip Mania
The tulip mania took place in the Netherlands in the 1630s and is also the first economic bubble. The prices of tulips rose in a period of 4 months up to twenty times the original price. In May 1637 this came to an end with a drop of about 99%.
The South Sea Company
The South Sea Company was a British investment company that focused on buying up government debt. It traded with Spanish colonies in South America. Sailors founded the company in 1711 and the hype reached its peak in 1720 when 2,000,000 pounds worth of shares came on the market at a price of 300 each. In the following months, the price collapsed, resulting in an economic crisis.
Great Depression
At the end of the 1920s, there was a huge investment in the stock market and the Dow Jones reached a high of 381.2 points in September 1930. 2 months later this value had already fallen 50%. By 1932 the average share had fallen in value by about 90%. The result was “the Great Depression,” an economic recession that kept America in check for years.
Is Bitcoin a Bubble?
We cannot tell whether Bitcoin is a bubble or not. The main argument you could use if you think Bitcoin is a bubble is that the bubble hasn’t burst yet and the worst is yet to come. No one knows whether this is the case.
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