Since my cryptocurrency post of three weeks ago we have seen cryptocurrencies launch into the next phase of their market sentiment cycle with Bitcoin gaining another ~50% and Ethereum roughly doubling (at their latest all-time highs on May 22):
Bitcoin/USD (Daily)
Ethereum/USD (Daily)
In the space of less than three weeks the total cryptocurrency space has tacked on nearly $40 billion in total market capitalization (to ~$77 billion at the recent highs).
The question I asked on May 4th was: Is it excitement or euphoria? The conclusion I came to was that cryptocurrencies were in an excitement phase, which was steadily building in strength. Based upon what we've seen since, the assessment I made then appears to be accurate.
In the last couple of days some interesting things have happened which prompted me to reassess and write this post. Several people who do not invest in markets in any meaningful way (including an uber driver!) reached out to me and asked my opinion of Ethereum. My answer was simple and basically identical to each of them: "I own some which i'm up more than 200% on in the space of less than 2 months. It probably goes a lot higher long term but we've seen a big move in the short term, so it may be best to wait for it to come back down to $100."
And I was surprised by the responses I received which were also all similar, to the effect of "It could go down a little or it could just keep going up right?"
I probably shouldn't be surprised by these responses though, given that financial markets are ruled by the human emotions of fear and greed. The attention that cryptos have received in the financial media AND mainstream media in recent weeks appears to have helped produce a strong whiff of greed which is currently wafting across the crytocurrency space. While this could mean the sector is fast approaching a violent correction, it probably won't be the final blow by any means.
Looking at this slightly more nuanced graphic of a market sentiment cycle we can see that when public greed begins to enter a market it is probably closer to the "thrill" phase but still well before the "euphoria" phase:
I don't sense that cyrptocurrencies are in a delusion stage and certainly not a "new paradigm" stage in which every single market participant wants to be an owner of that particular market and would in fact mortgage their house and sell their first born in order to get exposure.
There is no doubt the cryptocurrency space is hot, very hot. However, my best guess is that this sector will reach well north of $100 billion in total market capitalization before we are in the throes of a full-fledged "euphoria/new market paradigm" blow-off stage.
Disclosure: Author was long Ethereum at the time of writing
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