As bitcoin prices break all-time record highs, a commonly recurring theme — even among cryptocurrency adherents — is that valuations have entered bubble territory. It's an understandable concern. Prior to the hardfork event, the digital coin briefly slipped below $2,000. In roughly two months time, bitcoin has jumped over 125% in the digital markets.
In any other market, fears of an unsustainable bubble would be justified. However, bitcoin operates under a different standard. While traditional financial indices have seen their market capitalization levels stagnate for several years, the bitcoin market cap has in contrast steadily moved higher. Thus, applying the usual definition of "bubble" doesn't make much logical sense when it comes to bitcoin prices.
This point is further illustrated when we compare cryptocurrencies to the S&P 500 index. While the mainstream media raves about its resilience and robustness, few are willing to label the stock market as a bubble. Yet the actual data indicates that it is the benchmark indices that should worry about unsustainable valuations.
Let's take a look at the S&P 500's market cap:
Between December 2013 and June 2017, the S&P total market cap increased nearly 25%, while the market cap to index valuation ratio has declined nearly 5%.
This suggests that the market value of the S&P 500 has exceeded its fundamental value.
Now let's consider the bitcoin market cap chart:
Between December 2013 and June 2017, the bitcoin market cap skyrocketed a whopping 350%. At the same time, the bitcoin market cap to price valuation ratio increased by nearly 37%.
This suggests a trajectory alignment between bitcoin's market value and its fundamental value.
It's also critical to note that while the bitcoin market cap jumped 350%, bitcoin prices enjoyed a hearty 229% profit during the same timeframe. Yes, speculative fervor is strong in the cryptocurrency markets, yet the trading dynamic has pushed valuations to a similar magnitude. Therefore, bitcoin continuing to push higher to $5,000 and beyond is not at all out of the question.