Are We In A Massive Crypto Bubble?
Wall Street investments have reigned incomparably for a long time. Even when commodities and housing outpaced stocks, it was only a short-term gain. In the long-term, equities are the profit king.
But over the last decade, cryptocurrencies are intent on knocking the king off of the throne. Crypto is outshining the market and high-performing stocks. The three most popular cryptocurrencies have skyrocketed over a very short period of time.
Why Is Crypto Growing So Quickly?
This growth is due in no small part to the added levels of security brought by the blockchain. The decentralized digital ledger omits a third-party intermediary. Transaction updates are universally verified and recorded on the blockchain. And hackers can’t access a singular system because it instead resides on an instantaneously-updated global network.
Blockchain technology is so successful that experts are considering it the next-gen software for business processing. Ethereum’s blockchain is already being sought as a more secure alternative for contracts. And the private nature of the blockchain is particularly appealing.
But this privacy is a double-edged sword. Avoiding third-party financial institutions and using private and public keys to transfer funds directly lowers fees. One disadvantage, however, is that illegal activity is difficult to trace. Therefore, multiple government officials have expressed concern about its possible use by terrorists. These negative perceptions may lead to stiffer government regulations or a complete devaluation of all cryptocurrencies.
Popularity And Valuation
The unprecedented demand and increased cryptocurrency adoption suggest an artificial valuation. The meteoric price rise also worries some investors. When compared to credit card businesses that operate on a much larger scale, for example, the outrageously higher values of cryptocurrency indicate a bubble.
Fiat currency’s potential devaluation is a strong possibility as cryptocurrency makes revolutionary inroads towards mainstreaming. But because cryptocurrency doesn’t have intrinsic value, experts question whether the bubble will burst.
How This Can Hurt The Economy
And if the bubble doesn’t burst, peer-to-peer payments could continue unabated by financial crises affecting traditional banks. While some people may see this as a good thing, the adoption of currency unbacked by a government could result in a total economic crash. At the very least, consideration must be given to cryptocurrencies’ volatile fluctuations and how they could sustain an economy.
Even though stocks and bonds haven’t had such meteoric growth, there is still a lot going for them. For one thing, they produce actual income and have intrinsic objective value. Over the long term, a balanced stock/bond portfolio can produce excellent returns. Long holding periods tend to average out volatility, and more importantly, allow compounding interest to increase value—literally exponentially.
Still, precious metals and crypto can be part of a very well-diversified portfolio with stocks and bonds as the core. Diversification is essential: when one part drops in value, another part can go up, so it minimizes significant losses in a market crash or bubble.