Popping the "Bitcoin is a Bubble" Hysteria
Why cryptocurrencies are NOT in their bubble phase (YET!)
As the price of one single bitcoin today (12/06/2017 ) soars beyond US$ 15,000 with an astonishing 1,700% valuation alone in 2017 and almost 100,000% since inception , a bunch of tech outsiders , traditional banking and finance executives and the overall investors (that are avoiding bitcoin like the plague) starts screaming the "bitcoin is a bubble" motto (actually they want to say "cryptocurrency market" is a bubble).
Of course we would get the "Naysayers"… It's a HUGE paradigm shift, being the first time in modern history that mankind is moving forward to separate currency and government sovereign , similar when in the 17th Century , the Enlightenment movement started to divide the Church and the State.
Below I will try to explain why I think they are wrong and why we are not in a traditional market bubble speculation phase ( Yet! ) on cryptocurrencies.
First of all we need to define "what is an economic bubble" and what are the main aspects that drives up their formation and nurture them until they blow.
The classic definition of an speculative bubble lies in the definition of "when economic trades are happening in an asset price (or price range) that deviate strongly from the asset’s intrinsic value".
Translating it in Layman’s terms is something like :
"When anything that have any economic (market ) value is being traded way beyond his actual fundamental (usage) perceptive value"
More recent theories of asset bubbles formation suggest that they are sociologically-driven by fear and greed events. Reading the 14 Stages Of Investor Emotions And Trading Psychology , shows us that markets follows some specific psychological cycles that are cyclical.
This happens because investors and traders follows emotional patterns ( after all we are all humans ).Those emotions patterns affects our perception of "real value". When we have an absurd difference from market value to the fundamental (or intrinsic) real value of something , we are basic in the Euphoria phase , the highest peak of valuation of a market and this marks the point of maximum financial risk and an inflated bubble waiting to go burst.
To further analise it we'll need to evaluate the price difference from the real (today's) bitcoin intrinsic value from the (today’s) market value to call it a bubble or not.
What is (Today's) Bitcoin’s Intrinsic Value
Anonymity and Government protection is becaming a real valuable asset in the 21st Century
Let's go straight to the point. Today the real intrinsic value of bitcoin it's being the BEST financial asset for storing value regarding anonymity and legal protection from government violation arrest. Period.
That’s why cryptocurrency are often accused by "crypto deniers" that they are just tools for crooks and criminals. In a world where anonimity and government abuse protection are becoming more and more scarce , people (and companies) are starting to understand and perceive those advantages and how they can benefit from it. Being them a criminal or not.
The anonymity and legal protection financial assets market , often called as the "Offshore Financial Heavens" industry is a well develop market since the 80'’s , providing corporate and commercial services to non-resident offshore companies and for the investment of offshore funds.
High Wealth individuals hold in financial assets alone around US$ 21 to 32 Trillion Dollars ( Yes , Trillions!!!) guarded in offshore legal structures around the world protected by anonymity and legal arrest.They usually pay around $50,000 in legal and trust fees to set up an offshore trust and $10,000 a year to administer it and also may incur in extra compliance costs if they live in U.S.
Today , Bitcoin gives to anybody holding it , a better protection against asset's arrest and anonymity than ANY offshore legal structures (since laws can be modified or even change) leveraging those benefits to regular folks at a fraction of the cost of traditional offshore structures.
So different from being an exclusively speculative assets like Stocks , Bonds or even Tulips , Bitcoin have a real intrinsic value for any individual looking for a financial asset with legal arrest protection and anonymity in an easy to store and transport format because of it's digital format.
So are all those people buying bitcoin today looking for it's intrinsic value? NO , THEY ARE NOT!!!
I believe that the majority of all cryptocurrencies investment right now are mostly speculative , believing that the price and demand for those kind of assets will go up in the near future in a "the greater fool" theory strategy.
Nevertheless an other way to say it , is that it’s not the bitcoin value that is going up , it’s all other reserve of value asset classes that are being hammered against bitcoin. That’s true because even in a speculative driven acquisition, buyer’s are perceiving bitcoin as a better financial instrument than other assets or currencies available today and being even more important in the near future (otherwise no one will want to pay more for it).
"Bigger than Tulips" Market Price Rise
Bitcoin price is following an S-Curve of Technological Adoption, which is itself characterized by fractally repeating, exponentially increasing Gartner Hype Cycles.
As very well explained on the Nick Szabo 2002 essay (that some say it’s the real Satoshi Nakatmoto) called “Shelling Out: The Origins of Money”, money along side with language enabled early modern humans to solve problems of cooperation that other animals can’t. Nick’s argument is important because it gives us an understanding and explanation why bitcoin is inline with our historical observations on money since inception.
It's even more difficult to people understand that Bitcoin being a software on the blockchain is a decentralized application for payments that acts like a currency. It's like a "Currency-as-a-Service" solution with "privacy and legal arrest protection features" now and that will have many other features in the near future ( Buy today and get a lifetime free upgrades!!)
Bitcoin is not just a digital money , it’s a new kind of financial asset , it's a Product+Service currency with limited supply !!!
Throughout the 20th century every major mass-market technology that was near-universally adopted has exhibited some form of an S-curve, as indicated in the chart below:
In addition, S-curves are becoming more compressed as technology advances, leading to more pronounced vertical growth adoption phases.
Bitcoin price follows a typical S-Adaption curves , because to be a “Bitcoin Adopter” you actually need to buy that limited product from another person ( since can't create more ) in a supply and demand rule market adding more money inside the system that ends up bringing the valuation up together with the adoption.
Speculators from today can become Crypto users in the near future
Today those buyers are millions of people around the world. Only U.S based Coinbase, reached 12 million accounts in the last month.South Korea and Japan main exchanges have millions of clients too.
Every Bitcoin bought today it’s done by exchanging fiat money (that was stored in other reserve of value asset ) without leverage (regarding there is only available right now almost 17 million Bitcoins from a possible total of 21 Million) in a traditional economic free market driven “supply and demand” price action. You can’t have any leverage on the blockchain.
All those newcomers are now "crypto asset users". Similar to software piracy being a "necessary evil" to the software industry, that brings more paying users in the future because you teach them how to use it when they have the first contact with the technology, greed fueled investors are bringing millions of people to the crypto financial world. They became crypto investors or newbie crypto "HODLERS".
The Crypto "Chicken and Egg" situation
The cryptocurrencies dilemma has always being "no one’s using it , so there is no value". Right now , at the end of 2017 , we have an estimated 20 million people with cryptocoin wallets. In 2018 it can have more indivivual clients than any larger bank of the planet
Sooner than expected a lot of companies will start offering cryptocurrencies payments.Fortune 500 companies have US$ 2.5 trillion in offshore structure ( for legal and taxes reasons ) and they can start receving payments in crypto , reducing their risk in legal battles with governments regarding their taxes reducing strategies.
Let's not forget the 2 billion people around the world that are "unbanked" and can find in cryptocurrencies their financial solutions.
Future developments on the blockchains of cryptos can bring their intrinsic value even higher beyond their initial proposal. Segwit brought the possibility of sidechains with cheaper transfer taxes bringing transacional value to Bitcoin. Privacy and Fungibility can be enhanced even further too for an overall anonymity protection.
Daily usage will bring the percepction of "the real value" of cryptocurrencies and will narrow a lot of the discrepancy of the real price and maket price that create bubbles.
Will Regulators Crush Cryptos ??
If you can’t beat them , Join them
Cryptos can’t be blocked in practical terms and Governments will have to deal with them to pave the way for innovation that will bring more taxes to them. Specific legislation will come for sure and it will be the hot-topic in cryptospace for 2018 , but these laws are already written in the grey areas of current existent laws. They will seek only to empower law enforcement and prosecutors to go after criminals and laying the legal terms that keept institutional money away from cryptos.And that’s HUGE !!!
Regulatory laws will increase the intrinsic value of cryptos in the middle term as it brings more institutional money to it (and even more people with it).
Derivatives are like Air to Bubbles
One possible cause of speculative bubbles is excessive monetary liquidity in the system, which gives markets volatile asset prices caused by leveraged speculation that brings even more speculative movements.
Very different from other speculative bubbles that happened in the past , there is almost NO LEVERAGE on trades right now ( some Bitcoin futures derivatives are happening in the near future but they are not a reality today) and besides all the price speculation movement done by CryptoTraders (that can use some type of leverage) , every bitcoin bought must be kept in a digital wallet that keeps the user’s private keys.
Regarding just only a few crazy ones that are taking personal debt to buy bitcoin , there is no expressive leverage on the cryptocurrency system.
Bitcoin derivative are coming and probably they may or not accelerate further the price up , like a boy blowing a straw to form up a bubble, but today they actually don't exist in expressive volume.
Are we there yet ?
Even at a US$ 370 billion market value ( from a few billions in 2016) we are still way beyond to other financial assets classes. What will be the total money invested in digital currencies ?? Nobody knows and will depend the instrisic value and feature perceive on those assets.
If Bitcoin is real the new digital gold standard for a new privacy and abuse protected asset class , will it have some percentage of the US$ 40 trillion offshore asset investment ?? YES IT WILL !!!
How much ?? I don’t know , but we are way beyond that point yet. My guess ?? Around 4 to 12 Trillion dollars ( 10x to 30x today’s investment value) in 5 years.
Total Money Invested is NOT what create bubbles.
The REAL problem is the velocity of the amount of money flowing into a market that can drive the valuation even further that brings more speculative trade into the mix that turbocharges the big discrepancy between the intrinsic and market value.
Cryptocurrencies being a new animal on the financial kingdom , to really discover how fast can people start using it in a daily basis and actually perceive instrinc value beyond the market value is a total mystery . How fast can developers create more feature that can create even more instrinsic value to them ?? It’s a total mystery too.
Can the speculative money flow be faster than crypto market development?
Can crypto derivatives put even more gasoline to the fire and bring the discrepancy even faster? Yes It can.
Can regulations put an end to legal liabilities bringing the institutional "big money" to cryptocurrencies sending their price to the moon regarless of usage? Sure it can
Can regulation be so tough that can lower the perceive instrinic value of cryptocurrencies ? Unfortunately, It can too.
Who will be faster ? User's adoption or Market Price Valuation ?
It will all depend on the correlation between user value persecption and the current market value. Right now without leverage buying , we are seeing adoption and price valuation happening almost at the same time or at least at a constricted pace so far , as a new bitcoin investment always brings a new users to the system . Metcalfe’s Law states the value of a telecommunications network is proportional to the square of the number of connected users of the system. Cryptocoins ARE in fact financial telecom networks.
RIGHT NOW , WE ARE NOT ( YET! ) IN A BUBBLE MARKET PHASE , BUT WE MAY BE ENTERING INTO ONE!!!
Failing to delivery real world usage to those newbie speculative users will widen the difference of the "real" value from the overall market value and if the price continues to speculative grow up as more high pricing surges may brings more speculative users , it surely can create a bubble that will surely colapse in the future.
Only the future will tell us if we created the biggest speculative bubble of all time or if they initiated the world's 21st century financial revolution leading to Cryptocurrency Singularity.
***BE AWARE*** : Cryptocurrencies are inherently volatile in nature at this stage and no future performance is certain. DO NOT INVEST ANYTHING MORE INTO CRYPTOCURRENCIES THAN YOU ARE PREPARED TO LOSE IN TOTALITY.