Stages bitcoin and cryptocurrencies are going through
Most people investigating or even investing in bitcoin or other cryptocurrencies, don't understand the underlying reason some of them will continue to rise going forward. It has to do with historical movements concerning all asset classes, which are observable and predictable.
We'll look at the three distinct patterns history shows us always occur when a new or old asset class attracts interest, and why in regard to bitcoin or other cryptocurrencies we're only in the early part of the second stage.
The three stages asset classes go through
There are three stages asset classes go through. They are early adopters, the smart money, and finally the masses. Every time something garners the interest of people and institutions, these are the predictable stages they go through.
For example, the two most recent asset classes that eventually turned into bubbles that burst, were the Internet at the turn of the century, and real estate a few years later.
What's interesting about the two is the Internet represented a new asset class, while real estate one that has been around for thousands of years. The point there is when something new is introduced, whether an asset class or a way to use that asset class, it attracts those that are looking for ways to use it to their advantage.
In the case of real estate, people started bidding up the prices by flipping their houses on a consistent basis. They kept moving up in value until there was no one else that was willing to pay a higher price than they did. The final result was the owners that were left holding the real estate ended up being underwater, which means the price of the house was less than the loan they had on it after the price plummeted; they had to maintain ownership of the house because no one was willing to pay the price that was bid up beyond market rates.
The same happened with the Internet, and is happening now with some cryptocurrencies and many of the publicly traded companies that have exposure to them.
What is encouraging is, in the case of the Internet, the quality companies that were delivering value not only survived, but thrived in the years after the bubble burst. The same is going to happen with cryptocurrencies. There is going to be a bubble that bursts in 2018, but afterwards the quality coins will soar beyond previous levels, and should continue to do so for a long time.
At the early adopter stage, those that see something others don't are willing to take on a lot of risk, but at a low price. That's what happened with bitcoin, where many of those taking an early position got in for pennies, or even less. Many of those that held onto their coins are millionaires today.
Over and over again in history this has been how it played out. Once the asset starts to take off, it generates buzz and attracts the attention of the wealthy and smart money. By smart money I mean managed money, which today usually means hedge funds.
This is where we're at right now.
Smart money investment interest
We are in the early stages of smart money investment, with hedge funds and other institutions investing billions into the bitcoin and cryptocurrency sector.
During that time more people will become familiar with bitcoin and the overall cryptocurrency sector because of the soaring gains of many of the coins and companies with exposure to them.
The big money will attract increasing media coverage, generating even more interest in the sector from the masses. That will lead to the final stage of the process.
Investing interest from the masses
Once the masses start taking positions in bitcoin and cryptocurrencies, the prices will soar to extraordinary levels. At that point everything will be driven by emotion rather than the underlying fundamentals, which is by definition, what a bubble is. That's why they eventually burst, because they've moved beyond their intrinsic value, and the price can't remain at that level.
Some investors can misread the stage an asset class is in because they move in circles that can suggest mass interest, when in reality it's really interest that is coming from the people they associate with, giving the impression everyone is not only aware of the asset, but are taking positions in them.
For example, I've asked some people if they know what bitcoin was. Their response was that they had never heard of it. If they hadn't heard of bitcoin, they haven't heard of cryptocurrencies in general, or other specific altcoins either.
That means there will be a lot of upward movement in price by cryptocurrencies and bitcoin until it reaches bubble proportions, and then it'll come crashing down. Until then, we'll have corrections, but it won't be the bubble bursting.
Because of the volatility of cryptocurrencies, it can give the appearance of a bubble bursting. In the case of bitcoin it has dropped in value as much as 80 percent at a time, yet soon afterward soared above the level where it had dropped from.
When the crypto bubble bursts, all of the coins will come crashing down. That will come from the masses taking positions in a variety of coins they have no understanding of in regard to their purpose of validity.
Aftermath of the bubble bursting
Some look at this as an ominous event, but the truth is it will be a great time for bitcoin and cryptocurrency investors that performed due diligence and hold onto the coins that have a strong chance of lasting long into the future.
Those that took positions in dubious coins will probably lose all their money they invested in them. Many will go to zero because they are scams or aren't developed in order to meet the demand of the market.
The good news is after the cryptocurrency bubble bursts, the quality coins or tokens will remain, and they will soar to much higher levels than before the crash. This is where the real money will be made, and where once-in-a-lifetime generational wealth will be created.
For that reason it's a good idea to set aside some cash before this happens in order to buy the surviving cryptocurrencies and bitcoin and bargain prices that aren't likely to be seen again in our lifetimes.
The process asset classes go through have been recorded in history, and each time they go through the same stages before the bubble finally bursts. Again, we are at the second stage of the cryptocurrency boom. The third stage will happen in the near future, and that will eventually lead to the bubble bursting.
We shouldn't be concerned about this unless we're investing in cryptocurrencies that are highly speculative, even for cryptocurrencies. Bitcoin will survive the bubble bursting, although it will without a doubt participate in what for it, will be more of a correction. There are other cryptocurrencies that will survive intact as well.
The point to take away is to not panic when the bubble bursts. It has to occur in order to clear the debris out of the way and allow the quality tokens to rise out of the ashes. It should be considered a buying opportunity for those that understand what the coins invested in do for the market.
We should have the bulk of our crypto investments held in bitcoin, with the rest allocated to other coins that have a high chance of surviving and thriving in the years ahead.
Bear in mind that when the Internet bubble burst a lot of pretenders were crushed, but a company called Amazon emerged from the rubble, and the rest, as they say, is history. The same will be true of cryptocurrencies.
The asset class is here to stay, and what remains to be seen is how quickly it is adapted by many other industries. The financial sector is already using it to engage in transactions that lower costs significantly, and others are using it for online file storage and other uses.
Remember, one of the key things to consider for the survival of a specific cryptocurrency is whether or not it meets a specific market demand that other cryptocurrencies don't. In other words, like a business, it has to have a reason for existing.
The bottom line is prepare for the upcoming bubble bursting, and don't panic by selling off everything in hopes of salvaging a small part of your investment stake. If we do our homework, we should feel comfortable with holding on when the sector gets temporarily crushed. If nothing else, during that time, hold onto any bitcoin you have.
Just remind yourself that cryptocurrencies, or the blockchain, are here to stay. Many believe it'll be bigger than the internet.
Gupi on June 29, 2019:
Very interesting article. Thanks for sharing. I do think that one day bitcoin along with other cryptocurrencies may be used by the masses.
Robert Sacchi on December 19, 2017:
Interesting, it seems not only to apply to Bitcom & Cryptocurrencies. Is the best move is to wait until a bubble bursts then invest in the survivors?