While the term bubble is thrown around a lot, Bitcoin in late 2017 exhibited many classic bubble characteristics.
In December 2017, seemingly everyone was talking about Bitcoin—a cryptocurrency then nearing $20,000 per token. Bitcoin came up in conversation at Thanksgiving dinners and on many a ridesharing trip. Despite the widespread news coverage, most folks’ understanding of Bitcoin and how it worked was limited.
Some thought Bitcoin and its underlying blockchain technology would revolutionize money by bypassing banks and governments altogether. Bitcoin is a digital currency that can be traded anonymously between electronic storage locations called digital wallets. However, while currencies are normally liquid, stable in value and generally accepted as a medium of exchange, Bitcoin is none of these things.
In early 2017, more people began to view Bitcoin as an investment. But Bitcoin tokens don’t generate earnings, dividends, interest payments or any other fundamentally-based returns that one might expect from stocks or other traditional investments. Similarly, the tokens aren’t an investment in blockchain and don’t stand to benefit from broader adoption of the technology. Instead, Bitcoin’s price is driven primarily by speculation.
Exhibit 1 shows how Bitcoin’s price had risen from $998 in January 2017 to $19,497 on December 16th![i]
Exhibit 1: Bitcoin’s Meteoric 2017 Rise
However, by March 31st, 2018, it had dropped back to about $7,000.[ii] Still a huge rise! But those who joined the party in late 2017 likely got burned.
Financial media tend to use the term “bubble” liberally, but Bitcoin in 2017 was a good example of what bubbly investor sentiment, or euphoria, looks like. Some telltale signs of euphoria include overly positive investor expectations, fear of missing out (FOMO), a lack in understanding of the underlying investment and a belief that somehow “it’s different this time.” In late 2017, the sentiment around Bitcoin and cryptocurrency exhibited many of these traits.
The next time you hear about a hot new technology, industry or stock, do your own research. Simply following the herd can lead to a world of hurt, as it likely did for many Bitcoin buyers in December 2017.
[i] Source: CoinMarketCap.com, as of 12/03/2019. Bitcoin price in USD on 01/01/2017 and 12/16/2017.
[ii] Source: CoinMarketCap.com, as of 12/03/2019. Bitcoin price in USD on 12/31/2017 and 03/31/2017.