Question

1. What metrics/indicators could one have used to realise that there was a bubble in the value of these cryptocurrencies?
2. What do you think was the contribution of retail investors entering the crypto market?   
3. Based on finance theory, do you think that it is possible to have, in the future, a similar run-up in the value of cryptocurrencies?                          

Answer 1

a) There are certain ways that can be used to figure out whether an asset is forming a bubble. When the asset prices are rising and are far way from the intrinsic value of the stock and are still rising then there is high probability that these are bubbles. These types of bubbles will form when the economy is booming and the interest rates are low and the asset prices are rising even when the underlying or the fundamentals of it are not supporting that exaggerated value of the asset. A major indication of bubbles is that there is a lot of hype about that security in the market and even though not many people are aware as to how the business works many people choose to invest in that asset. This increase in rice will not be gradual but it would be over a small period of time say a year or two but the increase would be very large.

b) The retail customers are the ones who will actually be a part of the asset when the bubbles would be forming and it is about to collapse. Retail customer do not have normally too much detailed knowledge about these products but because the other person invested and made money they choose to follow that but they would buy the investment asset at higher prices and then the price will continue to rise but as more investors stops coming the asset price would stop rising and beyond a point it will collapse and the majority of looses are borne by the retail investors.

c) The value of any asset is determined by its cash flow generation ability and cryptocurrencies are not being used globally as of this stage but in future their demand might pickup and in that case the price might see a runup again. The use of cryptocurrency is not accepted in many countries, even some countries have banned this currency but if these circumstances change and there is wide acceptance of this method as a mode of payment and customer across the world can trust on this payment method then the price of cryptocurrency will see a rise again.