On October 8, 2017, the total market cap of the cryptocurrency market was $148 billion. Three months later, on January 8, 2018, the market cap reached its highest point of $ 813 billion. A staggering increase of 449% in just three months. However, one month later, as of February 6, 2018, the market cap dropped to $293 billion, a drop of 64% in just one month. It is clear that current cryptocurrency market is a bubble and we have only started to drop back to normal figures.
In a classic bull market, there are four phases: stealth phase, awareness phase, mania phase and blow off phase. In the first years of cryptocurrencies, it clearly was a stealth phase. Let’s say from the beginning in 2009 until the start of 2017, when the total market cap of cryptocurrencies increased from $ 0 to $ 18 billion.
Then the awareness phase started, with increasingly cryptocurrencies getting more attention in the media. This awareness phase typically ends with the first bear trap and this bear trap started end of August when the market cap dropped from $148 billion to $ 124 billion in less than three weeks.
The third phase is the mania phase, where FOMO (Fear of Missing Out) explodes and people go crazy. This results in examples such a family that sells all their possessions, live in a tent to hopefully make a profit with cryptocurrencies (oh boy I feel sorry for their kids now).
This phase starts when media attention explodes and all of a sudden everyone wants to get in. It started somewhere mid-October 2017 and finished on January 8, 2018. It reminds me of the story of Joseph Kennedy, a famous businessman in 1929 who was offered a tip by a shoeshine boy to buy Hindenburg stock:
“You know it’s time to sell when shoeshine boys give you stock tips. This bull market is over.” — Joseph Kennedy
The same applied to the cryptocurrency market; when all of a sudden everyone is an expert on cryptocurrencies, which are an inherently difficult to understand concept, even if you understand them; the bull market is over.
There we have it, we have reached the fourth and final phase of the bull market; the blow off phase. It starts with a bull trap, which is the first sell-off, starting January 9 until January 18. After a return to ‘normal’, when the market climbed back from $427 billion to $632 billion, we have now started the three phases of fear, capitulation and despair, where we could, possibly, return to a market cap the same size as at the start of the awareness phase. For your information, I do not believe we have reached the capitulation phase and there is more to come in the coming weeks. Even a Google Trends search on cryptocurrency and Bitcoin show the same trend:
However, a crash of the crypto market is not necessarily a bad thing. A market where we see 4000% profits in six weeks (for example Cardano) is not a very realistic market and has all the characteristics of a traditional bubble. Such a market behaves unrealistically, with all its consequences. One being that it attracts opportunists and criminals that want to make a quick buck.
After we reach the end of the despair phase, we can return to the mean and actually start building a new decentralised society. We will get rid of the scams — if not due to regulations then to the fact that there is no longer the possibility of a 4000% profit in 6 weeks — and we can focus on the potential cryptocurrencies have for building a better society.
After all, the technology is still in its infancy and it still requires a tremendous amount of investment in time, energy and resources before we have a truly decentralised society and economy. However, cryptocurrencies and the underlying technology of blockchain (or distributed ledgers) do have the potential to build a better world for all and I am happy to be part of it.
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Dr Mark van Rijmenam is the founder of Datafloq, he is a globally recognised speaker on big data, blockchain and AI, strategist and author of 3 management books: Think Bigger, Blockchain and The Organisation of Tomorrow. You can read a free preview of my latest book here. Connect with me on LinkedIn or say hi on Twitter mentioning this story.
If you would like to talk to me about any advisory work or speaking engagements then you can contact me at https://vanrijmenam.nl