3 Predictions for the Next Crypto Bubble

Key Points

• Bubbles of overblown optimism are a natural phase in markets, including the cryptocurrency one.

• Expect any new crypto bubble to play out differently than the ones in 2021 and 2017.

• Solana is more likely to drive the bubble cycle than Ethereum this time around.

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So far, the short history of cryptocurrency is a story of market bubbles, much like the historical bubbles you've probably heard of in tulips or dot-com companies, each driven by a shiny new idea that kept getting shinier until, suddenly, it didn't. The 2021 crypto boom and bust taught investors that euphoria can vanish overnight. Yet, despite many people learning painful lessons last go-around, prices are now rumbling higher again.

The next bubble, whether it's quietly forming now or arrives in a year or further in the future, won't look like the last one. On that note, I have three predictions about the next crypto bubble.

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1. Treasury fever will amp things up

Crypto treasury companies, like Strategy (NASDAQ: MSTR) (formerly known as MicroStrategy), keep buying Bitcoin (CRYPTO: BTC) by the thousands. Strategy now controls roughly 3% of the coin's capped supply, a feat that's encouraged dozens of copycats to follow suit and add Bitcoin to their balance sheet.

Crypto treasuries were a Bitcoin-only club in 2020, but the playbook has evolved. Now, altcoins and even meme coins are being gobbled up by treasury companies, and I predict that's what will be one of the defining features of the next bubble and the crash that follows.

A new twist emerged this month. Failed or struggling businesses in many different industries are pivoting into the wildest crypto treasury strategies they can manage.

For instance, a tiny pork-processing company that later turned into a Bitcoin mining operation raised $500 million to build a Dogecoin hoard, positioning itself as the Strategy of meme coins. If that sounds ridiculous, it's because it is. However, it shows how far down the risk curve treasury strategies can travel once boardrooms arrive at the (questionable) conclusion that such coins are balance sheet rocket fuel.

If the bubble gathers steam, expect other unknown but public companies to announce punts on everything from lesser-known meme coins with small market caps to illiquid non-fungible tokens (NFTs), betting the market will reward them for their bold vision.

The upside is obvious here. Scarce float of these assets pushes prices up when treasurers pile in to buy them, but the risk is equally clear. Concentrated corporate holdings become forced sellers if credit markets seize up.

2. One coin will set the pace, but another will steal the limelight

Every bubble needs a prime driver, and Bitcoin will almost certainly fill that role once again, owing to its sheer size and its increasing degree of integration with the traditional financial system. The surprise I'm predicting here is who will ride shotgun. In 2021, that honor went to Ethereum (CRYPTO: ETH) and its decentralized finance (DeFi) ecosystem. Next time, the secondary mover looks more likely to be Solana (CRYPTO: SOL).

Why Solana? Speed matters, as do low costs. Its low-fee design is becoming the default playground for artificial intelligence-driven DeFi experiments, as well as meme coin launches, a merger of function and fun that Ethereum's higher fees struggle to match. Other segments are falling into its orbit, too, and more are likely to be on the way.

During the second quarter, Solana earned $271 million in network revenue, outperforming Ethereum by more than double. With such a big difference in inflows, it's far more likely to see a major expansion when conditions get frothy.

3. There will be a longer fuse this time

Crypto's correlation with stocks rises when institutional participation is high, meaning big money subtly sets the tempo before the crowd piles in. In the same vein, crypto's current advance is institution-led. Exchange-traded fund (ETF) demand, corporate treasuries, and even tokenized funds are soaking up supply, while most investors remain cautious, remembering the sharp sting of the 2021 bubble popping.

Therefore, I predict that, contrary to the prior bubble's conditions, any new bubble's upward explosiveness will take much longer to play out.

The reason for this is that the sequencing of capital inflows to crypto matters. Institutions tend to buy methodically and sell methodically, extending rallies longer than in manias driven by smaller investors that burn bright and then collapse. If history rhymes, a new bubble cycle could grind upward for months before retail investors arrive en masse.

For investors, the takeaway here is to recognize the signs of a bubble forming early, size positions modestly, and remember that every bubble ends the same way, with gravity winning and many investors experiencing steep losses after buying during the very top of prices.

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Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.