Why I think the “Bitcoin Bubble” is not going to burst any time soon
There seems to be a strong consensus in the financial circles including government officials, bankers, journalists and even Nobel prize winners that the Bitcoin market specifically, and the cryptocurrency market as a whole, is in a state of a financial bubble which is about to burst anytime soon. And in fact the value of Bitcoin has already dropped from a peak of $20000 to around $7500 as of this writing.
I did not live through the Dutch tulip mania of 1637 so can’t say much about it, but I was an employee of Jacada, a Nasdaq traded high flying tech startup during the happy days of the dot.com bubble during 1998-2001, and I did experience first hand the effects of the dot.com bubble burst, losing on paper, hundred of thousands of dollars held in unvested stock options of the company, while seeing its stock value plummet from $37 to basically nothing over the course of a couple of years. Therefore, as someone who bares the (financial) scars of this event, I’m always on the lookup for new bubbles.
And admittedly, there are some aspects of the crypto market which resemble the dot.com bubble. The incredible hype, the hot money pouring in, the media frenzy, the blind trust in new technology, the obliviousness to difficulties and limitations and the unrealistic expectations derived from it.
However, there are some subtle differences between the dot.com bubble and the (possible) crypto bubble, which in my opinion will prevent any long term down trend in the crypto markets until the overall business climate changes.
Please consider the following
It is much easier to buy crypto than to sell crypto
I estimate that most crypto purchases now days take place by transferring money from a bank account or credit card to a crytpo exchange and then buying the crypto. For example the Ardorgate service enables sending Euro directly from a Mistertango bank account to the Ardor AEUR child chain token where it can be used to trade against other Ardor coins and assets.
There are very few restrictions about these transfers, since the buyer is using his already “legitimate” KYC/AML money, so the bank has no reason to prevent it. The other way around is more difficult, try sending a significant amount of money from your crypto exchange account to your personal bank account. This will immediately set all the alarm bells in your local bank branch, since money exchanged from crytpo is perceived as “suspicious” money. The bank, being afraid of the authorities, may ask for proof for the origin of the funds, ask for an accountant and/or lawyer approval that you were trading the crypto for yourself, ask confirmation that you’ll report your profits to the tax authorities or just down right refuse accepting the payment for no reason.
This phenomena creates huge imbalance in the crypto market, since it is simple to buy but difficult to sell and this causes the market to inflate. The irony is that the same folks who warn against the crypto bubble are the ones who help inflate it, by making it artificially difficult to use money which originates from crypto trading.
It is hard to put a value on the crypto market
Unlike the dot.com era, where stocks of internet companies without profits or significant sales were getting sky high valuations in contradiction to standard measurements and well known valuation methods like PE ratio, in the crypto market it is more difficult to estimate the potential valuation of a token. In theory, in the future, entire states may transition to using a cryptocurrency based on one of the existing blockchains, or entire states may choose to manage their citizen identity or national elections using blockchain based crypto tokens. How would this affect the valuation of the selected tokens? The value increase potential is almost unlimited.
The rest of the economy is clearly in a state of a bubble
From stock prices to bond yields to real estate prices it seems that the valuation of every potential investment is in a state of a bubble and the potential for inflation in fiat currencies is high. In a sense this makes your crypto investment a sort hedge against the unrealistic valuations in the traditional economy and also something cool, fun and exciting to do with your spare money.
(1) prophecy was given to the fools.
(2) I maintain myself the right to contradict myself.