The Cryptocurrency Bubble

Do we mean bubble on water? No, not really the kind we see when you add soap to water or watch it boil. What the bubble means is a mere description of something we cannot see. A bubble is simply a situation of high, unprecedented, and unreasonable value. In economics, we talk about glut and scarcity. This is almost true for every economic good. Value comes from scarcity and scarcity is a result of higher demand relative to supply.

Cryptocurrencies are also economic assets because they command value. The value makes them scarce relative to demand, and this is where the bubble itself comes from. Every person out there who knows about cryptocurrencies and the revolution that it comes with it is looking out for ways to invest and benefit from what cryptocurrencies and the blockchain claim to offer. With more people coming into the market to buy cryptocurrencies each day, the only way demand is controlled is through a price increase.

Demand for cryptocurrencies places pressure on the market. Sellers are only ready to make as much money as they can since the value of the currency is in its fiat currency worth. The asking price which is the lowest amount in fiat currency for which a seller is willing to give up cryptocurrencies for sale starts to increase. More pressure from buyers makes the sellers the kings, in this case, the price would continue to increase until prepared buyers ready to pay for and buy cryptocurrencies becomes the new sellers. These buyers ready to buy cryptocurrencies at high prices are bulls. The bulls transit to become sellers of the cryptocurrency creating a market of utter optimism. Bulls buy at the higher price and hope again that the price would keep increasing.

What happens is surprisingly different. The bull market is surprisingly surrounded by two armies of bears. The first group was the initial sellers of the cryptocurrency they sold for friendly prices and would not be ready to do anything worse than gain a bigger advantage. They keep their money to themselves. The other group is the unprepared buyers. For lack of money in the first place, they decide to do nothing their inability forces them to stay and wait for the price of their elusive treasure to go just down. What now comes up is a case of more sellers than buyers in the cryptocurrency market. The pressure would become so hard that the bulls would have to give up. The only competitive price that guarantees the Bull’s chances of selling is less than the cost price set earlier by the new bears who sold at high prices. The bulls start to sell at lower prices to sell at least. In the face of a few buyers, the competition tips the balance in favor of the lowest prices bid prices continue to reduce, and ask prices follow the same trend. The bubble has no way of sustaining itself than to burst.

What this article explains is what is typical of the cryptocurrency in a bubble the actual value of an asset or goods remains the same whereas the market forces work to make it very different.