Educational Byte: What Is an Economic Bubble and How Does It Affect Crypto? | HackerNoon

Let’s start by saying that determining the “real” value of an asset isn’t easy, and the free market, made up of people with quite subjective views, isn’t always helpful —sometimes, quite the opposite. If enough people believe, for any reason (imaginary or not), that a certain asset’s price will go to the moon and start buying massively, then it could happen. The problem comes when those same people start to panic because it’s never enough. That’s the moment when we have economic bubbles.

This type of “bubble” occurs when the price of something, like houses, stocks, or any other asset, rises much higher than its ‘actual’ value because of too much buying, often leading to a sudden crash. Just like inflating a balloon until, logically, it bursts. Now, even if it’s difficult to determine the ‘actual’ value of something, there are some common-sense pointers. For instance, do you believe that a single tulip bulb (the flower, yes) could buy 12 acres of land? Because it’s happened.

(In)Famous Financial Bubbles

Economic bubbles often lead to fascinating yet devastating stories of market collapse. One of the earliest examples is the Dutch Tulip Mania of 1637. In the Netherlands, tulips became highly coveted, and prices for their bulbs soared due to speculation. Some bulbs were sold for the price of lands and houses, but in February 1637, the market collapsed almost overnight, leaving many investors bankrupt. This event is a classic example of speculative mania and its consequences, though its impact on the broader Dutch economy remains debated.

A closer example to all of us is the dot-com bubble of the late 1990s. This one centered around the rapid rise of Internet-based companies. Investors poured money into businesses simply because they were labeled as “.com,” leading to wildly overvalued stock prices. By 2000, the bubble burst when these companies failed to deliver profits, and the Nasdaq index (the stock market) fell by over 78%. Many firms, like Pets.com, went bankrupt, though others like Amazon and Google emerged stronger.

There are more severe bubbles, though. The U.S. housing bubble in the 2000s was a major factor that led to the 2008 economic crisis. As property values rose, banks offered risky subprime mortgages (loans to borrowers with poor credit). When home prices began to decline in 2007, many borrowers defaulted, triggering a financial crisis that led to the Great Recession. This collapse caused widespread economic fallout, with millions losing their homes and jobs. It also spurred stricter financial regulations to prevent a similar disaster.

Cryptocurrency Bubbles

Someone will try to tell you that cryptocurrencies are economic bubbles, but that’s not true. They’re a new type of asset, and, as such, determining their ‘real’ or ‘intrinsic’ value has been a wild ride. Cryptocurrencies aren’t financial bubbles themselves, but they can suffer from financial bubbles. And they have, indeed, suffered from some big bubbles over the years.

For instance, 2017 is very well remembered by all crypto users. In December of that year, cryptocurrency values, led by Bitcoin, skyrocketed to unprecedented highs, with Bitcoin nearing $20,000. By early 2018, panic selling, fraud, and hacks caused prices to plummet. By year’s end, Bitcoin lost 80% of its value, sinking below $4,000, and most other cryptocurrencies followed, marking one of the largest market collapses in history.

The crypto market is quite resilient, though, and it recovered eventually —when the panic and pessimism faded and with the arrival of other good news. Six years later, Bitcoin has crossed $100,000 per unit, and the whole crypto market capitalization is over $3 trillion. Of course, we can’t say that all coins have survived their own bubbles.

Terra (LUNA) and the FTX Token (FTT) are examples that never recovered from big crashes. In the end, it all depends on the valuable features (or not) offered by a certain crypto ecosystem and the support of its community.

For its part, Obyte, founded in 2016, has been resilient to economic bubbles due to its focus on decentralization and utility over speculative hype. Its DAG (Directed Acyclic Graph) structure eliminates the need for middlemen and offers an efficient, low-cost network. Obyte doesn’t rely on energy-intensive mining or validator rewards, minimizing dependency on volatile token economics.

Its real-world use cases, such as data verification and decentralized finance, further establish its value in utility rather than speculation. This way, Obyte is building a truly decentralized future!

Featured Vector Image by WangXiNa / Freepik