Is the Cryptocurrency Bubble More Like Housing or Dotcom?

In the last two decades, we have already witnessed the collapse of the dotcom bubble, as well as the housing bubble. Both of these periods reflect shared characteristics that are found in all major bubbles: that overall confidence from investors could not be supported by the market. This ultimately caused the bubble to burst. While an estimated $5 trillion was lost amongst shareholders between 2000 and 2002 during the dotcom bubble crash, the $7 trillion loss when the housing bubble burst amounted to 50% of GDP (as per the data in the infographic by ETX Capital).

With new cryptocurrency options showing a significant boom over the last year, a number of analysts and investors have highlighted the new digital currency space as a potential new bubble. Here, we’re questioning whether the cryptocurrency bubble will more closely reflect the dotcom or housing bubble.

The Cryptocurrency Bubble

After skyrocketing in value in 2017, Bitcoin has seen significant crashes in the last month. The latest price moves show that Bitcoin and other digital currencies are still a speculative investment with an enormous amount of volatility. If we do witness a collapse in the cryptocurrency bubble, there would be significant financial loss for both businesses and investors.

Digital currencies are typically isolated from the wider financial system, which offers a potential buffer of this asset bubble does collapse. Unlike the housing market crash, which was intertwined with many aspects of the financial system, cryptocurrencies typically matter most to the individuals who hold them. In this way, the collapse of the cryptocurrency bubble poses less damage than that of the 2008 financial crisis.

One of the main differences when analysing both the housing bubble and the dotcom bubble is that whilst many investors lost a great deal of money during the dotcom collapse, the boom associated with this asset bubble produced lasting positive effects as well. This included new mobile technology such as cloud technology and smart devices. It can be argued that many of the newest developments in technology, from social media platforms and e-commerce spaces to new cryptocurrencies like Bitcoin, owe a great deal of their foundation to developments made during the dotcom boom.

Lasting Positives from the Cryptocurrency Bubble

Similar to the dotcom crash, even if the cryptocurrency bubble collapses, there will be a number of potential positives that will remain. One of the most significant technological advancements stems from Blockchain technology. This technology that supports the ‘mining’ of cryptocurrency has already proved extremely useful in other key industries. While cryptocurrency investment may lose value, new technology advancements associated with this industry could have broader applications in mainstream markets.

Opinion is very much divided when it comes to Bitcoin and digital money investment as both Lloyds and Virgin Money have stopped customers from purchasing cryptocurrencies with their credit cards. This is amid concerns that some customers could potentially rack up too much debt. It’s important for any investors to research cryptocurrency and understand what they are getting into. You can follow current cryptocurrency trends on platforms like ETX Capital, as well as make your own investments in Bitcoin.