Cryptocurrency: "The Digital Tulip"?

(22 February 2021) During the last five months, the price of Bitcoin increased more than five times - from $10,000 to over $50,000 while the global cryptocurrency market capitalization topped $1.7 trillion. When it comes to traditional assets, such a rapid rise in the value of an asset typically indicates the emergence of a financial bubble. But, what about cryptocurrencies?

• Against the tsunami of cryptocurrencies' market capitalization increase, financial bubbles of the past look like small and mid-size waves, historically adding 40 to 440 percent to the asset value. The value of global cryptocurrency markets increased almost 900% from March 2020 to today.
• When do bubbles usually reach their peaks? In looking at past bubbles,  the longest time period is four years with an elongated period experienced by the real assets markets. If the cryptocurrency bubble is compared with digital asset bubbles, like the Dotcom and Biotech bubbles, it may peak 13-21 months after the bubble started to blow or between March and December 2021.

Is this time different? Well, we don't know the answer. Since the famous "tulip mania" bubble in 1636-37 economists have not yet found reliable tools for forecasting bubbles. Super-easy monetary policy and expansionary fiscal policies in the US and around the world coupled with the accessibility of financial instruments and stock exchanges for a wide range of non-professional investors may make this "digital tulip" bubble different than bubbles of the past. These factors make it more difficult to predict how much the peak value of Bitcoin and other cryptocurrencies can exceed their fundamental price levels defined by the cost of coin mining and infrastructure maintenance.