These had grown exponentially, with the technology-dominated NASDAQ index leading the way, rising from under 1,000 to more than 5,000 in the space of 5 years.

Not only was it full of speculative investing, with no real evidence, but the overabundance of venture capital funding for startups was rife, turning a company with almost nothing of value into a highly sought out investment.

Traders like me knew we didn’t care what the companies were doing. Our job was to ride the bandwagon but jump before it fell off the cliff. With my investing hat, I knew truly valuable companies, like Amazon, was going to be too few to hold onto. Most people cannot tell the difference.

At a broker like 24option, you will have Contracts for Difference (CFDs) traders, who will want to ride the moves up and down, but I imagine most will say they are not looking to buy and hold a CFD for 10 years.

Many of these investors and venture capitalists in the dot-com era had abandoned the standard approach of investing. Instead, they feared they would miss out on the opportunities to capitalize on this ever-growing market of tech stocks, and in doing so, they left common sense at the door and let their emotions take hold.

1000/10 Rule

There is a rule when it comes to defining a bubble, which you may not have heard of before, and that is the 1000%/10 year rule. This rule states that if an asset appreciates in value by 1000% in the space of 10 years, the likelihood of the asset becoming a bubble is true.

Source: Charles Schwab, Bloomberg data as of 7/9/2017.

If you analyze the graph above, you will see a number of assets that have fallen into the bubble category and have followed the same pattern. As mentioned above “Bubbles most commonly rise 1000%, over 10x, over 10 years. The 10-year buildup is important to how embedded the bubble becomes in the economy”.

When it comes to cryptocurrencies, however, it is a different kettle of fish. These digital assets haven’t followed the same path as other assets, which you will notice below.

It is pretty hard to miss the elephant in the room (or on the graph) when it comes spotting what’s wrong with this graph. Where typical assets like commodities and the NASDAQ have taken 10 years to become embedded in the economy, Bitcoin, on the other hand, has taken approximately 2 years to reach an evaluation of over 1200%! So what does this mean? Is Bitcoin a massive bubble waiting to burst? Bitcoin could very well be in a bubble, judging from the image above, but that doesn’t mean we are going to see its collapse anytime soon.

Source: Google Finance Website

Allow me to draw your attention to this chart of the NASDAQ, which shows the period of the Dotcom crash, but what we also see is the recovery of the asset. After the crash you can see there is a period of recovery during the years after, and then the housing crisis of 2008 took place, which caused it fall yet again, and from that point on, there has been a period of growth from 2008 to 2018. What this shows, is that an asset could potentially burst, but it always has the chance to recover and grow at an exponential rate and recover any of the losses it suffered in the first place. Nevertheless, remember that past performance is not a reliable indicator of future results.

If the likes of Bitcoin does crash, then I don’t think it would be the end of the cryptocurrency market for good, because there are some real-world uses for the technology behind it.

Alpesh B Patel (@alpeshbp)

Alpesh is a hedge fund manager and Author of Trading Online (Financial Times). He is a partner to 24option who offer CFD trading on Cryptocurrencies.

The content of this article constitutes Marketing Communication and does not qualify as Investment Advice or Investment Research. This article is produced by Alpesh Patel. Any views or opinions presented in this article are solely those of the author and do not necessarily represent those of 24option. The article is of a general nature and does not take into consideration individual readers’ personal circumstances, investment experience, and current financial situation. 24option accepts no liability for the content of this article, or for the consequences of any actions taken on the basis of the information provided.