jm_rrs (OP)
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Today at 09:16:56 AM |
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Economic bubbles are not a new phenomenon. We've seen the dotcom bubble in 2000, the real estate bubble in 2008, and the "everything" bubble in 2020.
Why do I say that a large-scale cryptocurrency bubble is likely to happen in the near future, around 2028-2030?
1/ What is an Economic Bubble?
An economic bubble occurs when asset prices surge far beyond their true value, often driven by speculation and market sentiment. After reaching unsustainable highs, prices plummet rapidly, leading to a wave of sell-offs.
Take the example of the 2008 real estate bubble. The bubble occurred when housing prices in the U.S. rose rapidly, far exceeding their true value. Banks provided subprime loans, meaning they lent money to people who could not afford to repay. When interest rates rose and housing prices dropped, millions of people were unable to pay their debts, leading to a wave of foreclosures and defaults. As a result, financial institutions involved in these loans were also affected, triggering a global financial crisis and an economic recession.
To understand better, you can refer to the movie The Big Short. This film is about the 2008 financial crisis, focusing on the stories surrounding the collapse of the U.S. housing market.
2/ The 10-Year Economic Cycle
The economy typically goes through cycles of growth and recession, lasting around 7-10 years. We saw recessions in 2000, 2008, and most recently in 2020. Based on the latest recession caused by the pandemic in 2020, the next recession could occur around 2028-2030. This cycle consists of four main phases: recovery, growth, recession, and crisis. We may currently be gradually entering the growth phase.
Economic recessions are often closely linked to asset bubbles. An asset bubble occurs when the value of an asset rises rapidly, far beyond its true value, due to factors like speculation, market sentiment, and an increase in credit or investment. Once the value reaches an unsustainable level, the bubble bursts, leading to a sharp decline in prices and causing financial turmoil.
3/ Factors That Could Form a Cryptocurrency Bubble
a) The Fed Will Continue Lowering Interest Rates
It is likely that the Federal Reserve (Fed) will continue lowering interest rates in the near future, though the rate of reduction will be gradual. In a recent meeting, the Fed lowered interest rates more than expected (by 0.5 percentage points), from 5.25% to 4.75%. The Fed is expected to continue gradually lowering interest rates in the coming period to combat inflation and maintain a stable labor market.
Lower interest rates will increase borrowing and investment opportunities, potentially driving Bitcoin's value up excessively, similar to what happened with the real estate bubble in 2008.
b) Strong Investment from Major Financial Institutions
Several large funds have actively entered the Bitcoin market, including BlackRock, Fidelity, Vanguard, Goldman Sachs, and Morgan Stanley. The involvement of these major funds and financial institutions reflects confidence in Bitcoin's long-term potential as a store of value, especially in the context of current inflation and global economic uncertainty.
Especially when large financial institutions participate, Bitcoin prices can surge due to significant capital inflows, causing demand to far exceed supply, particularly as this involvement garners attention from the media and retail investors. This rapid and substantial increase could result in prices outpacing the asset's true value, potentially forming a bubble.
c) Technological Factors and Grand Promises
Cryptocurrencies are closely linked to emerging technologies like blockchain, DeFi, NFTs, and Web3, which bring significant potential and achievements.
- Blockchain ensures high transparency and security for transactions. It has proven effective in creating transparent and secure transaction systems, with applications in supply chain management and record-keeping.
- DeFi (Decentralized Finance) offers financial services without the need for traditional banks, increasing access to decentralized financial solutions. DeFi has expanded financial services accessibility, particularly in developing countries.
- NFTs (Non-Fungible Tokens) have opened up a new market for art and content creation. NFTs have created a marketplace for digital art, enabling artists to protect ownership rights and connect directly with buyers.
- Web3 promises to create a decentralized Internet where users can control their own data. Web3 is gradually taking shape, bringing expectations of a decentralized Internet that offers better personal data control for users.
These stories about the future applications of such technologies often lead investors to set high expectations, which can drive the value of cryptocurrencies up unsustainably.
d) Lack of Fundamental Valuation
Unlike stocks or real estate, cryptocurrencies lack easily measurable intrinsic value (such as profits, revenues, or cash flow). The valuation of cryptocurrencies largely depends on supply and demand, expectations, and news, making them highly susceptible to inflation when there is positive news or overly high expectations.
4/ Conclusion
Bitcoin is at risk of gradually forming a large-scale bubble due to support from major financial institutions, the Fed lowering interest rates, and the 10-year economic recession cycle. Institutions such as investment funds and banks have ramped up their investments in Bitcoin, driving its value significantly higher, which could lead to a wave of speculation from retail investors.
The Fed's lowering of interest rates after a recession has shifted capital towards riskier assets like Bitcoin, as lower interest rates reduce borrowing costs, and investors are more willing to take on higher risks in search of profits. The 10-year economic recession cycle also presents an opportunity for Bitcoin to be seen as a "safe-haven asset." However, its real value can easily be inflated by expectations, leading to the risk of a bubble bursting.
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