How Bitcoin Bubble Markets Work

If history is a teacher, technology grows in booms and busts. This seems particularly true of network technologies. It seems even more true when you combine financial assets with network technologies.

Bubbly talk

It would be hard not to talk about the price of bitcoin this week. As of this writing, BTC hit an all-time high of $99,655.50, which puts it within striking distance of the major psychological milestone of $100,000.

Hitting $100k will be a big deal for a few reasons, but mostly because, like it has done in previous cycles, hitting that milestone is likely to trigger the interest of more investors and more capital.

In other words, by hitting $100,000, bitcoin will likely trigger a bubble or bubble-like behavior.

Bitcoin is notoriously bubbly, so much so that it's becoming a scientific discipline. This is pulled from a recent study that was published in the journal Nature, for example:

"The starting hypothesis is that there must indeed be parallels between Bitcoin prices and those of other speculative assets. After the empirical study, the hypothesis was confirmed. This research shows that there are significant coincidences between the behavior of Bitcoin prices and that of previous well-known bubbles. Therefore, thanks to this study, the idea that Bitcoin is an asset that tends to behave in the form of a bubble is reinforced."

But even without an academic study, looking at the peaks and valleys of bitcoin’s charts over the past decade is enough to confirm that there are notable boom and bust periods.

In the case of bitcoin, the boom times, or bubbles happened in 2013, 2017, 2021, and now, well…

Financial bubbles have happened for as long as markets have existed. Bitcoin’s bubbles are compared with one of the earliest and most famous financial bubbles — the tulip mania that happened in 1636.

Understanding the mechanics of a bubble is pretty straightforward — it’s basically when FOMO or fear of missing out takes over — and new investors and more capital flood the market not wanting to miss the top.

We can all understand that FOMO feeling because it’s part of how humans work.

It’s basic psychology.

It’s also why we see this kind of behavior form around other non-financial trends, like Pokemon cards, for example.

This is all to say that the bubble dynamics are not limited just to crypto.

Why bitcoin’s bubble dynamics exist

In the context of bitcoin, the market bubble dynamics are a feature, not a bug.

The hype cycle or the boom/bust cycle serves the purpose of bringing more people and more capital to the market.

Sure, for the investors that time the market wrong or enter at the top, and then get quickly wrecked as the bubble pops and the price recedes, the bubble dynamics can lead to negative sentiment.

But bitcoin bubbles are part of its underlying design. This is a point missed by a lot of people, including new entrants to the market looking to catch the top.

Bitcoin’s bubbles are fueled, on a regular schedule, by its halving dynamics.

Each halving tights the supply side and creates issues related to mining activities and other conditions that drive the price up following basic supply and demand theory.

The last bitcoin halving was just this past April.

According to a study published in the June issue of the journal Sustainable Futures:

"However, despite numerous empirical studies on the determinants of the Bitcoin speculative bubble, this event is often overlooked. This omission could have significant consequences for institutional investors who make decisions based on scientific research results. It may lead to a partial understanding of price dynamics and expose their portfolios to increased investment risks. This is because they will not be prepared for potential price volatility leading up to the halving.”

It’s also helpful to think that each market cycle is a series of bubbles or a chain of bubbles, that all connect at regular intervals to drive market adoption, development, and innovation.

Since bitcoin’s bubbles, so far, happen in relation to halving events, which occur every four years, it’s kind of like bitcoin bubbles are the financial market equivalent to the Olympics or the World Cup.

At regular intervals, the world gathers around and finds itself captivated by new storylines and new unbelievable feats, but eventually, it all comes to an end and we all go back to our normal lives until the next go-around.

And that’s where we find ourselves right now.

If the past few weeks of bitcoin’s price climb are any indication, then it feels like we are entering a new phase and potentially the next bubble.

The role of bitcoin’s market dominance in the overall crypto market

It’s important to understand the role of bitcoin as a crypto market leader.

When the dynamics described above play out, the impacts will trickle down to the rest of the crypto market, essentially driving bigger bubble behavior.

This is when understanding why market capitalization and market dominance come into play. Historically, bitcoin has always been a market leader. Its current market dominance is 57.68%.

Understanding bitcoin’s dynamics, and its bubble-by-design architecture helps to understand how related assets perform, and what to expect from Open Money markets.

As a parting word, bubble markets and the overall hype cycle can be fun to watch and participate in. But they can also cause financial distress and ruin for people who get too caught up.

Be sure to keep in mind that all bubbles pop, eventually.