The broader crypto market is off to a great start in 2023. Top cryptocurrencies such as Bitcoin, Ethereum, Solana, and others have more than recovered from the FTX fiasco, with some coins even posting double- and triple-digit gains YTD. However, such turnarounds are often met with speculation and fear.
For instance, when Bitcoin spiked earlier this month, market participants were quick to label the rally as a ‘bull trap’. Fortunately, the crypto market was able to sustain its growth, thus rendering the bull trap speculation obsolete.
That brings us back to square one, with analysts still clamouring to explain this sudden trend reversal. Some market experts believe that the current trend reversal could point to a possible “echo bubble” and there is some evidence to back this notion. But what is an echo bubble, and how will it affect future prices? Tag along to find out.
What is an echo bubble?
An echo bubble is a premature market recovery after a much larger bubble has just burst. This sort of price action closely resembles the dead cat bounce chart pattern. While the name might sound pretty macabre, the reasoning behind this chart pattern is that even a dead cat can bounce a little after it has fallen from a substantial height. Therefore, if we look at this bounce on a graph, it may seem like a revival from a massive drop. However, it is just another bubble that, like all bubbles, will also burst and leave behind its fair share of damage.
However, unlike a dead cat bounce, echo bubbles usually take far longer to play out. For instance, Bitcoin rallied from the $1,000 mark in early 2017 to $20,000 a few months later, before falling to the $3,500 range in 2018. Following this bubble, Bitcoin began posting a revival in 2019, rising to around $12,000 before falling to $5,100 in early 2020.
The rally in 2019 was later labelled as a “textbook echo bubble” by Mark Dow, a former IMF economist. This echo bubble began in April 2019 and only fizzled out by early 2020. This is unlike a dead cat bounce which usually only lasts a few days. Moreover, in an echo bubble, the extent of the upward trend and drawdown is much lower compared to the preceding bubble.
For instance, in 2017 Bitcoin rallied nearly 1,900 percent (from $1,000 to $20,000). Whereas, in 2019, Bitcoin rallied 400 percent. In the 2017 bubble, Bitcoin fell from the $20,000 range down to the $3,500 mark by the end of 2018. Whereas, in the 2019 echo bubble, BTC fell from around $12,000 to a low of around $5,100 by early 2020.
Is the current crypto rally an echo bubble?
For starters, the timeline fits perfectly. Historically, echo bubbles usually occur one or two years after a large bubble has burst, as seen in the 2019 rally, which was an echo of the bull run experienced two years earlier. As such, 2021 saw the biggest Bitcoin bubble to date, with BTC touching an all-time high of $69,000 before plummeting to $15,000 a year later. Therefore, the sudden revival in 2023 fits perfectly into the timeline of previous echo bubbles.
Further, Lucas Outumuro, the head of research at IntoTheBlock, a crypto intelligence firm, highlighted 3 reasons why the current rally could be an echo bubble. Firstly, he states that the market cap of stablecoins is on the rise. He also states that, in November and December 2022, following the collapse of FTX, the price of futures contracts plummeted well below spot markets. However, that has changed in recent months, and as of this moment, the price of futures contracts has once again risen above the spot markets.
Finally, Outumuro states that blue-chip NFTs are performing better than Ether. While the second-largest cryptocurrency by market cap has recorded 31 percent gains since the start of the year, eight out of the top ten NFT collections have still managed to outperform ETH. This revival is quite surprising given the plummeting sales volumes of NFTs towards the end of 2022.
According to Outumuro, these three signs point to an increased risk appetite in the crypto market. This could prop up prices further, putting the crypto market “on track for another echo bubble like the one recorded in 2019.”
If this rally is indeed an echo bubble, the obvious question is where will the upward momentum end? Head of Digital Assets Trading at GoldenTree, Avi Felman, believes that the pinnacle of this supposed echo bubble could lie around the $27,000 mark.
“In 2019 the echo bubble was Bitcoin running off the lows ~341%. So if the ratio holds, Bitcoin could run ~74.6% off the lows which would be ~27k. ETHBTC in that scenario could be .085 which would have it ~2300,” read Felman’s tweet from January 13.
Early Bitcoin proponent, Erik Voorhees has a more optimistic outlook. In a recently conducted Bankless podcast, Voorhees predicted that BTC could reach $40,000 in 2023. That’s a 155 percent increase from Bitcoin’s November 2022 low.
Conclusion
An echo bubble is not necessarily a bad thing. For investors, an echo bubble can present an opportunity to make quick gains. It also fills the market with optimism after a large drawdown.
However, it is very hard, if not impossible to spot an echo bubble. In most cases, these market conditions are identified after they have already occurred. Moreover, when it comes to cryptocurrencies, we all know how volatile the market can be. Therefore, it is important to conduct your own research and invest only as much as you can afford to lose.
