Is There a Crypto Bubble About to Burst?
Author: Jason King
If 2017 was the year of the crypto craze, 2018 might be labeled the year of the crypto rollercoaster. With token values bouncing up and down with more frequency than a Cirque du Soleil acrobat, investors and financial pundits are wondering, is this the end of the crypto bubble?
In this piece, I look at the reality of the cryptocurrency marketplace and compare where it is to other, historically inflated markets. We’ll also discuss some of the drivers of the recent price volatility to see what the future holds.
What Is a Bubble, Anyway?
The housing market has ups and downs.
The stock market has ups and downs.
Virtually any financial market has ups and downs.
So what exactly makes a “bubble?” And are we in one?
According to Investopedia, “A bubble occurs when investors put so much demand on an asset that they drive the price beyond any accurate or rational reflection of its actual worth.” We’ve seen this phenomenon as early as the 17th Century when the Dutch overpaid for tulip bulbs, betting that demand would continue to rise. At the height of the tulip craze, a single bulb could command upwards of 10x the average annual salary of a skilled craft worker. The market eventually collapsed and prices deflated, leaving new winners and losers.
In recent history, we’ve seen the same sort of rapid rise and extreme deflation in the housing market in 2006–2009, the dot-com bubble in the 1990s, and the Japan asset bubble in the late 1980s.
The problem with bubbles is that a lot of people can lose a lot of money. Investopedia continues, “Like the soap bubbles a child likes to blow, investing bubbles often appear as though they will rise forever, but since they are not formed from anything substantial, they eventually pop. And when they do, the money that was invested into them dissipates into the wind.”
In the wake of the dot-com bubble, the NASDAQ index dropped almost 80%, triggering a recession. “Stocks sunk. Companies folded. Fortunes were lost, and the American economy started to slip down a slow mudslide that would end up in full-on recession,” writes Ben Geier in Time.
The housing market crash of the 2000’s contributed in part to the Great Recession, a worldwide economic contraction. “The resulting loss of wealth led to sharp cutbacks in consumer spending. This loss of consumption, combined with the financial market chaos triggered by the bursting of the bubble, also led to a collapse in business investment. As consumer spending and business investment dried up, massive job loss followed,” explains the Economic Policy Institute on its website.
How Do You Know You’re in a Bubble?
Let’s review: bubbles occur when asset values are overstated, unsustainably so. When the bubble pops, a crash ensues, and bad things like a decline in investment and unemployment can occur.
It’s clear we want to be wary of bubbles. But are there warning signs letting us know to be on guard? That’s part of the problem. A bubble is transparent. You can’t always see it. And you almost never know when the crash is coming until it happens.
In a traditional financial market, such as the stock market, you can identify a bubble by looking at metrics like price-to-earnings ratios, market valuation, and stock price, and by examining historical data. For the housing market, you can compare increases in home prices to increases in salaries, and look at interest rates and average mortgage sizes.
But in the crypto market, things are a bit different. For starters, there is no real “historical” data (compare the eight years’ of bitcoin price data to the 200-year history of the New York Stock Exchange.) There’s not a lot to compare to, so making market predictions based on historical data is a fool’s errand.
What’s a Token Worth?
Next, it’s difficult to compute what the inherent “value” of a cryptocurrency is. Our typical, tactical methods for assigning value to tangible items are null and void in the burgeoning coin economy. And even the meta-thinkers among us may struggle to determine how much bitcoin is “too much.”
“Blockchain is not merely a type of technology or a tool. It stands for a future economic model with decentralization, decentralized applications (DApps), community, and digital tokens as its central characteristics. A ‘token’ in this context is actually a carrier of ownership of data. Internet is a form of data connection. Blockchain is the next breakthrough in value transfer of data,” explains Hitters Xu, founder of Nebulus.
How much is a token worth, then? If blockchain can create the monumental shift in financial markets and impact everything from how we buy and sell houses to how we buy strawberries, is it possible the crypto assets market as a whole is under-, rather than over-, valued?
“According to experts, the real value of Bitcoin is difficult to determine,” writes Jessica Vomiero in Global News. She says that Andreas Park, an associate professor of finance at the University of Toronto, argues that because the digital currency has been assigned value in an unregulated exchange, the bubble was created the moment the price rose above zero. In other words, it holds no intrinsic value, so any rate is an overpayment.
That argument, however, falls apart when we look at the history of money and value exchange. A unit of exchange of any sort — including gold — has value only because the parties involved in the exchange agree it does. An ounce of gold is no more “intrinsically valuable” than a one-carat diamond or a baseball signed by Babe Ruth or a Pet Rock. They’re valuable because we agree they’re valuable, just the same as with a bitcoin.
Ups and Downs of the Market
Philosophical discussions aside, one concern with the current crypto market is the volatility we’ve seen since early 2018. Are these typical “growing pains” of an immature market, or are they signs of impending doom? Is the dip we’re experiencing a mere blip, or does it portend something more ominous?
To answer that question, it’s useful to look at the of the primary sources of the volatility:
1. Industry reality check. By the end of 2017, it seemed like any startup with a half-decent whitepaper could issue an Initial Coin Offering (ICO) and raise a few million dollars. But now token sale backers are wising up and being a little more discerning about where they choose to put their money.
“The rush for buying tokens/coins which have no working product, main-net, poor teams, etc. seems to have reached [a] zenith,” writes Shaurya Malwa for Hackernoon. And once you’re at a zenith, by definition the only direction to go is down.
In this case, that might mean fewer, but better ICOs. Fewer, but more discerning, dollars from backers. Fewer, but better, tokens overall. Call it a bubble or call it a correction, it’s a good sign.
2. Increased government intervention/regulation. Governments and governmental agencies around the world are just starting to figure out how to treat tokens, ICOs, and the crypto market. As a result, we’ve seen a comparatively large number of guidelines and regulations enacted in recent months. And as pressure from authorities to regulate the market increases, market prices have naturally fallen.
Unfortunately, these regulatory agencies don’t really know what they’re doing and are scrambling to make sense of the industry. Some of the regulations issued contradict each other, some are overly invasive, and others don’t go far enough. “No one seems to have a coherent and well thought-out regulatory strategy,” writes Elad Kushnir in Forbes. “To make things worse, many regulators are contradicting each other and inadvertently injecting more chaos into what is already one of the most complex and fast-paced emerging industries in the world.”
As regulations, rules, laws, and guidelines continue to be enacted, we’ll see a corresponding response in the market — bubble or no bubble.
3. Nature of cryptocurrencies’ growth. “What people have to understand about this marketplace is that it’s a maturing marketplace,” Cole Diamond, the CEO of Canada’s top cryptocurrency exchange Coinsquare, told Global News.
As more people enter the market and learn more about it, there will be more variation in prices, particular with a market that’s only a fraction the size of the stock market or even the gold market. “It’s healthy correction,” he said. “Markets have volatility and this market will have more volatility because it’s still maturing.”
Mack agrees. “It’s hard to overstate how early it is in the history of these technologies, particularly Blockchain,” he says.
Where Do We Go From Here?
So, are we in a bubble with the crypto market? Have we seen the beginning of the end, with more carnage to come? Will we soon see a complete crypto crash, where the majority of investors attempt to exit the market, resulting in massive losses?
The answer depends on whom you ask.
Many experts, including those covering investment news for traditional business publications, would say definitely. Others, including Ethereum co-founder Joseph Lubin, disagree. “I would argue that we’ve seen a correction in our space, calling it a bubble to have been popped is a little bit shortsighted,” he told Bloomberg.
The more significant topic I’d like you to consider that it doesn’t particularly matter that much whether we call the current volatility a correction, a crash, or just the normal state of affairs in the relatively immature cryptocurrency market.
The housing bubble and dot-com bust had devastating effects on the world economy, from which it took years to recover. Even if the crypto token market were to crash entirely — which I don’t anticipate — its consequences for the world economy would be nowhere near as far-flung as for these other scenarios, or what economists see from the Japan asset bubble of the late 1980s/early 1990s. The US Great Recession and the Dot Com Bubble far eclipse the perceived crypto “bubble” in terms of size, scope, and worldwide impact.
The total Crypto Market Cap as of mid-September is $198,672,265,273
When compared to the calamitous crashes we’ve grown weary of, we’re looking at a market cap that’s a fraction of that size.
As understanding of crypto and blockchain technology spreads into the mainstream, more people will enter the market, with more ability to make informed decisions. I think this growth in numbers and knowledge will help to smooth some of the extreme ups and downs.
Likewise, as governments come to terms with cryptocurrencies and create rules and regulations that actually make sense, the market will settle down as well. As the saying goes, it’s easier to deal with the devil you know than the devil you don’t. Knowing instead of guessing how governments are going to respond will give backers and startups alike a sense of security, and security in a market always leads to more stability.
“The world is now only beginning to legitimize Bitcoin. It will take years before the true value of blockchain is understood by the masses. In the meantime, cryptocurrency will continue to progress through periods of massive volatility. However, the general trend will be upwards — and dramatically so — as the market progresses towards its peak,” says Noam Levenson in Hackernoon. It’s worth noting that Levenson believes that an inevitable crash is coming, as occurs in all markets, but we’re far from the top of the market.
For those with a vested interest in the industry, the best thing to do right now is continue moving forward. We’re in this for the long haul. Revolutions take a while to gain traction, and along the way, there are going to be ups and downs. Claiming in some of the downturns that “the end is near” is counterproductive fuels speculators’ fears and works against the greater cause. Instead, view the volatility as growing pains and ban the word “bubble” from your vocabulary.
Jason King is a Humanitarian Hacker, feeding the hungry as the Executive Director of Unsung.org. Known for running across the country to raise bitcoin for the homeless in 2014, King is a long-standing member of the crypto community and continues to solve to the sector’s most pressing problems as Co-Founder of Kingsland University — School of Blockchain, the world’s first university-accredited blockchain training program. Find out more about Kingsland’s leading-edge education at KingslandUniversity.com
