The inspiration for this post came from the recent “Crypto-Calamity” as the market spiraled into a panic when the price of Cryptocurrencies fell drastically in a short period of time. Shortly after that episode, tonnes of people started throwing legitimate investment advice around such as “buying on fear” and “market corrections” in the hope to get the price back up sooner. However, these devices might be wrong if cryptocurrencies were bubbles, which still remains to be seen. Therefore, this post will focus on differentiating bubbles from the state of being overbought so that we can make better-informed choices to enter into a particular stock or asset when there is a sudden and major correction.
Quality and intention of the majority of investors
Allow me to properly explain what I mean when I say quality and intention. As investors, we are aware that though investors are all in search of yield and growth, not all of us believe in greed fuelled rallies. That is because investors recognize the creation of value from either business activities and/or demand and supply. You can call that realism but in reality, value creation requires a lot of effort for it to be sustainable and lasting. Otherwise, investing is nothing more than a mindless act of gambling and believing that you can make money simply because the stock or asset price is going to go up.
Purpose of the asset’s existence
Compared to company shares, some assets’ purpose can be considered ambiguous simply because it serves no real purpose in the economy. Other asset prices might be driven by merely greed and fear and in such cases, it is hard to justify or quantify its value. In today’s context, currencies that are not guaranteed by countries and their governments experience extreme volatility due to trading activities. This brings cryptocurrencies to mind and while I have no doubts that greed will be able to sustain this virtual asset’s temporal value, I am in no hurry to rush into the scene with actual cash because the purpose of its existence is still half-baked. This is because it is hard for investors to price an asset that depends on nothing but its future purpose and adoption by large entities such as nations and corporations.
The ease of justifying price movements
Market volatility is a natural occurrence for almost all publicly traded products due to trades made between parties who are looking to buy or sell the same assets. However, there will be occasions when certain price movements are difficult to explain. Most of the time, the reaction of the market should be explainable perhaps due to weakened demand or increased uncertainty in its sector. But when the price movements become irregular and unexplainable too often, then it is likely a bubble because it is common for people to force an explanation even when it is not the real reason.
Closing Thoughts
No doubt cryptocurrencies are here to stay for a significant period of time, my stance remains that it is now nothing but a glorified bubble. Don’t get me wrong, I might buy into cryptocurrencies eventually after the hype is gone. At that point, who knows, the price of such assets might become vastly different from what it is today and become an asset with an important purpose for its existence. Therefore, until such time when there is confirmation when a particular asset is not a bubble, do practice caution and avoid if possible as there are tonnes of other investible assets for you to choose from.
