Crypto storm brewing: Are cryptocurrencies in a bubble-like state waiting to pop? Experts debate likely outcomes

Dubai: Speculations have been building on whether or not cryptocurrencies as a whole are in a bubble-like state, meaning if the industry faces the threat of a potential crash.

Historically, the price of many cryptocurrencies have always proved to be extremely volatile, rising and falling by hundreds or even thousands of a per cent.

However, even as die-hard enthusiasts are of the resolute view that cryptocurrency prices will keep soaring at a time when traditional notions of value don’t apply.

‘Crypto winter’ fuels fears of a crash?

‘Crypto winter’ refers to a sharp slump, followed by a drop-off in trading and months of market doldrums -- a phenomenon that memorably befell the crypto market in 2018.

Bitcoin’s price plunged by more than 80 per cent to as low as $3,100 (Dh11,386) from the end of 2017 through December of the following year. Bitcoin wouldn’t reach a new high until December 2020.

Despite hints that the market is currently undergoing a similar ‘crypto winter’ season, the interest among investors surrounding cryptocurrencies refuses to let up. This is what fuels the ‘bubble’ debate.

Some crypto analysts opine how it’s hard to tell whether the soaring interest around a particular cryptocurrency is justified — or a bubble about to burst.

This is because traditional financial analysis doesn’t apply here. A stock analyst, for instance, determines whether a firm’s shares are expensive or cheap by assessing its business model and future prospects.

However, those metrics don’t help value cryptocurrencies. Belief and demand alone can drive value of these assets.

Strategists say the speed and scale of the losses, which have wiped out more than $1 trillion (Dh3.67 trillion) in notional wealth in a matter of weeks, echo the pop of the Dot-com bubble in 2000.

For many who have witnessed previous financial bubbles popping, the signs appear to be there, given that violent rallies are currently giving way to even more violent selloffs.

Cryptocurrency prices are plunging, again

As stocks were sold off early this week, crypto prices also plunged. Bitcoin dropped nearly 13 per cent before rebounding along with stocks. Ethereum’s own coin, Ether, was briefly down 15 per cent.

Recent cryptocurrency downturns have wiped out huge amounts of wealth. Cryptocurrencies have had a rough start to the year.

So far in 2022, Bitcoin had lost about 20 per cent in value year to date, and Ethereum and Binance Coin dropped about 30 per cent and 25 per cent, respectively, in that period, despite a late surge higher.

Their price declines have dragged down other digital asset prices, too. Analysts attribute the decline to investors who are pulling their money out of higher-growth, risky assets as interest rates are set to rise.

That has put a dent in the argument, promoted by crypto boosters, that digital assets offer a hedge against losses in other markets.

Despite their volatile and occasionally inscrutable nature, cryptocurrencies are becoming more widely traded, used and held.

El Salvador started accepting Bitcoin as a legal currency, central banks worldwide are studying whether to issue its own digital coin, and wealth managers are encouraging clients to explore crypto assets.

So how does a new investor make sense of crypto and its ever-changing landscape? Crypto experts reveal that it’s getting harder to decipher.

Crash or not – that is the question

The world’s largest cryptocurrency Bitcoin is expected to see over 50 per cent price decline this year from its peak of around $68,000 (Dh249,764) in November last year as the Bitcoin bubble begins to deflate, according to US-based investment management firm Invesco.

In a list of 10 improbable but possible outcomes for 2022, Invesco’s global head of asset allocation Paul Jackson said that the mass marketing of Bitcoin reminds us of the activity of stockbrokers in the run-up to the 1929 crash – the US stock market crash.

Jackson noted that the rise and fall in Bitcoin value was akin to a ‘financial mania’ wherein prices go up for three years before the peak is achieved followed by steep losses as prices decline for the next three years.

“We know how that ended and Bitcoin has already followed closely the downward path of a template that suggests a loss of 45 per cent is experienced in the 12 months after the peak of a typical financial mania,” said Jackson.

“The (mania) template also suggests that bubbles typically deflate for a further two years. Hence, we think it is not too much of a stretch to imagine Bitcoin falling below $30,000 (Dh110,190) this year,” he added. The 12-month period before and after the peak in price is referred to as the ‘Maniac phase’.

Bitcoin had started to scale up from around $9,000 (Dh33,057) back in July 2020 to over $63,000 (Dh231,399) in April last year before plummeting to below $30,000 (Dh110,190) in July, data from CoinMarketCap.com showed.

It peaked at around $68,000 (Dh249,764) in November and since then, the price has been on a downward trajectory. Bitcoin hit $41,500 (Dh152,429) in the first week of 2022 and was currently trading at $37,080 (Dh136,194).

In contrast, global investment bank Goldman Sachs had earlier this month predicted a rise in Bitcoin price.

According to a report by Goldman Sachs, the crypto could go a little over $100,000 (Dh367,000) within the next five years by taking market share from gold as a by-product of broader adoption of digital assets.

What a crypto crash means for your digital asset portfolio?

The question on everyone’s lips at the moment is that whether the crypto market will recover, when and is now a good time to stick or twist?

There are differing opinions and a wide range of answers to those questions so be sure to do what’s best for you and your individual circumstances.

Over the course of the last year, Bitcoin has seen its value surge 255.65 per cent – even when you take into account the previous crypto crashes.

The overall price at present is nowhere near the record highs the cryptocurrency enjoyed mid-April but is still up on this time last year - and by some distance. Zooming out further, the price of Bitcoin has soared by 65,800.91 per cent since February 2014.

Some experts view that at this rate of fall, Bitcoin is likely to see support in the short-term even if the selling continues, and surviving this fundamental onslaught can set a new run that will create a new all-time high of $70,000 (Dh257,110) in the mid-to-long term.

Yet this view is not shared by other savings and investment specialists, who warned against investing for anyone who doesn’t understand the market. The level of volatility means that savers who choose to invest in cryptocurrencies must be prepared to lose all their money, the experts further note.