What is a crypto bubble? Why do crypto bubbles burst?
The term "cryptocurrency bubble" applies to the skeptic's perspective on cryptocurrencies, which holds that the growing price of cryptocurrencies creates a massive bubble. True believers include Nassim Taleb, author of The Black Swan; Michael Burry, who truncated sub-prime mortgage securities as recounted in The Big Short; Berkshire Hathaway members of the board, particularly Warren Buffett and Charlie Munger; and a slew of other detractors. Many Nobel Laureates in Economic Sciences, central bankers, and investors have labeled Bitcoin and other cryptocurrencies as speculative bubbles.
Why and when do crypto bubbles burst?
It's difficult to predict when or if the crypto bubble will burst. Cryptocurrency values are extremely volatile, as seen by this week's sell-off. However, die-hard fans believe prices will continue to rise in a world where traditional conceptions of worth no longer apply.
Many cryptocurrencies' prices may be very volatile, fluctuating by hundreds and even thousands of percent. While many people feel digital currencies are the main blessing since sandwich bread, I think the crypto industry is crumbling for the following very valid reasons.
There is relatively little real-world usefulness.
One of the most significant disadvantages of digital money is that it is worthless outside of a cryptocurrency exchange. Although we've seen a few high-profile corporations or organizations take Bitcoin or Dogecoin, the total number of businesses adopting either is negligible.
Businesses have been sluggish to accept blockchain technology.
On paper, blockchain appears to be a fantastic technology. On the finance side, it's a means to speed up payment validation and settlement. Instead of waiting for a week for cross-border transactions to clear, they might be completed in seconds or minutes. Blockchain has non-financial uses as well. Ethereum's smart contract-driven blockchain might one day be the solution to removing supply chain bottlenecks.
Centralization is still an issue.
Decentralization is one of the many purposes of cryptocurrencies. This is done to guarantee that no single person or small group of individuals has complete control over a network. Nonetheless, according to BitInfoCharts.com statistics, Bitcoin and Dogecoin ownership are very consolidated. Only 2,155 addresses own about 42 percent of all Bitcoin, while 99 addresses control 66.6 percent of all outstanding Dogecoin. It's conceivable that people are realizing that these financial experiments aren't as decentralized as they were designed to be.
Not all countries are on board with cryptocurrency.
The crypto bubble is also bursting because some countries are unwilling to allow cryptocurrencies to undercut their central banking system currencies.
The crypto market is plagued with leverage.
The Bitcoin crash might also be attributed to over-leveraged investors. Customers can apply 50 to 125 times leverage on their real account equity at some of the most famous cryptocurrency exchanges. While this isn't an unusual degree of leverage in forex, where currencies change in fractions of a penny, it's completely absurd in cryptocurrency, which can move 3 percent in a matter of seconds.
New technology is constantly overhyped by investors.
Finally, investors usually overestimate new technology uptake. Even though there is no lack of people who are excited about blockchain, it has been over a half-decade and the blockchain hype has yet to materialize into real corporate deployment. It takes time for any new technology to develop, and crypto will be no exception.