Will cryptocurrency-bubble burst or bounce back? That is the single biggest question among many electric currency enthusiasts make in response to wild price swings experienced in recent months. After a dramatic rise to record highs of $20,000, Bitcoin (BTC) has come down tumbling amidst struggles to stabilize above the $7,000 mark.
— Financial Times (@FinancialTimes) August 20, 2018
Cryptocurrency Bubble Burst Thesis
Wild price swings have seen cryptocurrencies market value tumble from record highs of $800 billion to $200 billion. The crash has in some sense fueled a bubble burst that might take the cryptocurrency value to zero.
While crashes in the mainstream financial sector are not something new, there are still some concerns as to whether cryptocurrencies will be able to navigate the stormy water. According to Yale University economist, Aleh Tsyvinski the probability of cryptocurrency collapsing in value to zero is low at just 0.3%. The economist bases his arguments on the fact that markets have also experienced periodic shocks and bounced back.
For instance, the NASDAQ Composite did rally by more than 78% in the run-up to the dot.com burst in 2000. The index did rally again before tumbling down during the financial crises of 2009. It has since bounced back and experienced one of the most significant bull runs.
“Our calculation is 0.3%. If you completely risk neutral, then based on the historical performance of cryptocurrency, you would assign a probability of 0.3% that its value will drop to zero,” said Mr. Tsyvinski.
Cryptocurrencies Bubble Bounce Back
One of the reasons why most people remain optimistic about cryptocurrencies surviving the current sell-off tide has to do with their ever-increasing use case and applications. Digital currencies are increasingly finding their way into mainstream industries all but fuelling talk they are here to stay as the currency of the future.
For instance, Australia’s crypto exchange Cointree has teamed up with AI Payment firm Gobbill to allow people use cryptocurrencies to pay for bills. Financial services giant Northern Trust with $10.7 trillion in assets under management is in the process of investing in hedge funds betting on cryptocurrencies.
Increased adoption and acceptance is one of the reasons why it is highly unlikely cryptocurrencies value will drop to zero.