It’s no secret that bitcoin, ether and other cryptocurrencies have been on a tear.
But, is this sharp uptick in value a sign that these innovative technologies are building greater legitimacy, or is it simply the latest evidence that the early-stage assets have been driven up by the speculation of a small set of true believers?
Previous CoinDesk articles have examined this question, examining market activity, polling analysts and looking at Google Trends data. One article looked at whether cryptocurrencies had entered a bubble earlier this month, when their total market cap neared $50bn.
Interestingly enough, this market cap surpassed $90bn earlier this week, representing a year-to-date (YTD) gain of more than 400% from the value of $17.7bn at the start of the year, according to CoinMarketCap data.
At the time of report on 26th May, this market cap had retreated to $80.1bn, representing a YTD gain of more than 350%.
This year, several cryptocurrencies have experienced notable increases in value.
The price of bitcoin, for example, reached $2,791.70 25th May, which represented a more than 200% increase from the cryptocurrency’s price of roughly $923.67 at the start of the year, according to the CoinDesk Bitcoin Price Index (BPI).
Amid this sharp rally, bitcoin’s market cap has surged, surpassing $45bn earlier this week, a roughly 50% increase in the last month, additional BPI figures show.
At the time of report, the currency’s price and market cap had both fallen back somewhat, reaching roughly $2,440 and $40bn at 16:30 UTC.
Alternative asset protocols have experienced even stronger gains so far this year, as these currencies draw robust inflows.
The price of ether, which powers the smart-contract platform ethereum, the second-largest cryptocurrency at the time of report, surged more than 2,500% from roughly $8 at the start of 2017 to an all-time high of $228.37 on 24th May, CoinMarketCap figures reveal.
Even after pulling back to roughly $180 at the time of report, ether’s price had risen more than 2,100% YTD, according to CoinMarketCap.
XRP, the token of the Ripple network and the third-largest cryptocurrency by market cap, experienced even stronger gains, climbing more than 6,000% from roughly $0.07 at the start of the year to approximately $0.43, according to CoinMarketCap.
At the time of writing this asset has dropped somewhat, but is still trading around $0.30, a YTD gain of more than 3,000%.
While cryptocurrencies have generated very strong gains this year, analysts offered mixed views on whether they are in bubble territory.
Some market observers stated emphatically that the price of these assets have grown inflated.
Jehan Chu, managing partner at Hong Kong-based cryptocurrency fund Jen Advisors, was of this view, telling CoinDesk:
“There is definitely a bubble forming in cryptocurrencies … the recent market cap surge is largely due to the up-cycling of crypto wealth being re-invested into the space. While new money is coming in, most of the market cap is speculative gains being redistributed into new projects.”
He told CoinDesk that he believes only a few projects will be the ultimately beneficiary of these gains, naming bitcoin, ether and zcash as assets with staying power.
Charles Hayter, co-founder and CEO of exchange service CryptoCompare, offered similar input, stating that a lot of the current price growth is speculative.
“There is a lot of misinformation and information asymmetry which can lead to poor decision making and a trading herd mentality,” he said.
But this behavior is certainly not unique to newer asset classes, he noted.
“Throughout history we have seen this pattern re-repeat itself – whether it’s the South Sea bubble or with various crazes or new discoveries and even the internet bubble. Greed takes hold and rationale flies out of the window,” Hayter said.
In spite of all this, there is a silver lining, as “it’s through the shakeout that real winners are found,” he said.
While some analysts warned that cryptos may have entered bubble territory, Arthur Hayes, co-founder and CEO of leveraged digital currency platform BitMEX, emphasized that these assets could experience further inflows now that wealthy individuals have started looking.
“We are finally at the point where wealthy individuals, those with [more than] $1 million of liquid assets, are considering whether to allocate a very small portion of their net worth into digital assets,” he said. “If this happens on even a small scale, the value of the entire industry will be in the hundreds of billions of dollars in short order.”
The broader cryptocurrency space may be well-positioned to draw additional inflows, due to the constant creation of new alternative asset protocols and the ever-changing range of value propositions they provide.
Tim Enneking, chairman of Crypto Asset Management, commented on this development:
“The growth of alts has changed [cryptocurrencies] from a one-trick pony to a range of investments in which one can construct a portfolio.”