We’ve arrived at that moment when fear and doubt may soon grip the market. Especially new investors in Bitcon, who may have bought in at $40,000 USD and are now seeing negative PnL, might not quite know how to feel.
YouTube is filled with bitcoin bulls, moonboys and the usual naysayers spelling the bubble is soon to burst and people should be prepared to lose all their money. It seems the naysayers have not developed their arguments much since the last bull run in 2017.
It is true that Bitcoin is volatile and corrections should be expected, but it’s even more important to understand market cycles.
What are the phases of a market cycle?
There are many ways to frame market cycles and try to account for the way an asset behaves in a certain context. One well-established lens through which to interpret the market is Gartner’s hype-cycle, which provides a framework for adoption.
The graph basically describes the process by which a technology or product is adopted, how inflated expectations drive the price up too high, and how, following a sell-off and period of disengagement, growth can then proceed to take place in a gradual manner.
Oftentimes, when critics speak of a ‘bubble’, it is because they’re expecting a mass-sell off, and often an exact repetition of a previous event. But what we want to press in this article is that markets do not simply move up and down – instead, they evolve.
Have a look at this graph, for example, and how it depicts the workings of a bubble from a psychological point of view.
When we look at previous bubbles, including Bitcoin in 2017, we can see that there may be some truth to this framework.
However, does this mean that investors who bought in at $40,000 should now be trembling with fear and expect a repeat of 2017?
Perhaps it would help if we assess Bitcoin’s previous price movements and bubbles.
Looking at this graph, you might be reluctant to view those first three rallies as ‘bubbles’, but the reality is they were no different from what we are seeing today – it’s all relative.
A price movement from $1 to $100 is the same as from $100 to $10,000 in terms of percentile growth. However, when placed on a price chart, the first rally seems tiny compared to the second one.
Let’s have a look again at the chart, but this time, placed on a logarithmic graph that looks at percentile growth rather than price.
As we can see from this graph, which does not include 2019, 2020 and 2021, we can see continued growth which unfolds cyclically through bullish and bearish episodes.
Is Bitcoin a bubble?
Bitcoin is not a bubble. It is a bathtub full of bubbles. Would you want it any different? Let’s be clear… Bitcoin is not a treasury bond.
Perhaps most importantly, new investors in Bitcoin need to understand that when critics in the media are calling Bitcoin a bubble and telling people instead to buy gold, it is probably because they manage a fund and have a vested interest in gold. Likewise, bitcoin Bulls telling people Bitcoin will rise to a million within a year, are probably holding Bitcoin.
As a retail investor, you need to make up your own mind. Who is currently driving the market? If large investors such as Michael Saylor, Jack Dorsey and Paul Tudor Jones are investing in Bitcoin, how do they do this? Do they buy once and quickly take profit a few weeks later? Or is institutional demand for Bitcoin for the long-term?
The answers to these questions should be fairly obvious once we understand the reasons why these investors are putting their cash reserves into Bitcoin and what their time frames are.