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Are We In A Digital Currency Bubble?

Jul 2, 2017 AltcoinsBitcoinEditor's PicksInsights 0

The cryptocurrency market experienced a 20% decline recently, with the combined market value falling from $115 billion USD to below $90 billion USD. The combined digital currency market cap was approximately $25 billion and $17 billion three and six months ago, respectively. While Bitcoin has benefitted from this trend, the smaller, emerging altcoins have appreciated in value even more. The altcoin combined market cap soared over 9 times in the last three months. This begs the question – are we in the middle of a digital currency bubble?

Cryptocurrency Market Capitalization – Last 12 Months

Looking at the one-year historical chart, the price increases have been driven by the activity in the last three months. In early April, Japan recognized Bitcoin as a legal method of payment. Moreover, the recent surge in ICOs ( Initial Coin Offerings ) has had a positive impact on the demand and value of Bitcoin and Ethereum. These cryptocurrencies, as opposed to FIAT currencies, are often required to purchase altcoins. These developments have attracted interest from retail investors, speculators and led to an exponential or a “hockey stick” chart for most altcoins. 

 

Market cap from coinmarketcap.com
Taken from CoinMarketCap

According to CoinMarketCap, today there are over 900 cryptocurrencies, compared to 617 at the beginning of the year. This represents about a 30% increase in new coins that have been added to the market. Interestingly, the number of digital currencies has increased about twofold from August 2014 and tripled from June 2014. Therefore, the higher number of altcoins is also, to some extent, responsible for the increase of the overall market cap. 

Dips and temporary corrections create an opportunity to purchase digital coins at a discount. At the same time, emerging altcoins with well-established business models provide exposure to new currencies with higher risk/reward profile. It’s wise to diversify your holdings into a portfolio of several digital currencies instead of investing into one or two. Also, consider an allocation strategy within the portfolio to match your risk tolerance and risk aversion. Lastly, review your overall asset allocation strategy which would encompass various asset classes you’re investing in, including stocks, fixed income, real assets, commodities, and cryptocurrencies.

Three years ago, investors and speculators argued Bitcoin was in a bubble after hitting an all-time high of over $1,100 USD and subsequently declining to $250 USD. However, assuming you purchased Bitcoin at its peak in 2013, your investment would return about 2.5 times with Bitcoin prices around $3,000. This is equivalent to 50% IRR ( Internal Rate of Return ), which is far greater than the returns you earn as an equities or even as a Private Equity investor. It’s possible that we are in bubble territory and some correction can be healthy to stabilize the market. That’s not to say that the digital currencies would not recover and increase in value in the future, although at a slower pace. 

 

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Davit K

Davit is a corporate development professional at one of Canada's largest FinTech companies, responsible for strategic planning and execution of M&A transactions. He spends his free time traveling and writing about new developments in blockchain and crypto currency world.

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