Crypto-currencies, tulips, market bubbles

Finance writer and ex-banker Frances Coppola writes about financial bubbles. She says the cryptocurrency market shares characteristics with earlier bubbles like Dutch tulips and dotcom stocks.

She writes:

There are three key stages in the lifecycle of a financial bubble:

The "Free Lunch" period. A long, slow buildup of price distortion, during which investors convince themselves that rising prices are entirely justified by fundamentals, even though it is apparent to (rational) observers that they are buying castles built on sand.

The "This is nuts, when's the crash?" period. Everyone knows prices are far out of line with fundamentals, but they carry on buying in the irrational belief they can get out before the crash they all know is coming. Speculators pile in, hoping to make a quick profit. Prices spike. 

The "Every man for himself" period (sorry, FT, I couldn't find a reference for this one). Prices crash as everyone runs for the exit. This can happen a number of times, separated by brief periods of stability when everyone congratulates themselves on a lucky escape. But they are wrong. The ship is sinking. 

Which means a crash is underway. This does not only apply to Bitcoin, but to all of the cryptocurrencies.

The remarkable aspect of this is that everyone couldn’t see it coming. As Coppola points out some investors still don’t accept the likelihood of a crash.

It will be interesting to see what remains of crypto currencies after things settle down. The idea of a blockchain isn’t going away, despite it being far less useful than the hype surrounding it suggests. It could be that the, at times irrational, enthusiasm  for cryptocurrency is coming to an end or it may simply be drawing breath for another bubble to form.