This Crypto Bubble is not the .COM Bubble
We’ve never had a decentralized, global, digital asset class. Anyone who thinks this looks like something else or is making predictions or pretends to totally understand this phenomenon is lying to you or themselves. With that, I cannot help but make some predictions. Please don’t place any stock in them :)
History does not repeat, but it rhymes. This crypto bubble is a bubble, but it’s different than all other bubbles and there are significant unknowns that will play a huge role in how things play out.
When I say “crypto” I mean the cryptocurrency asset class used primarily for speculation right now.
When I say “blockchain” I mean the decentralized software protocols that can be used to build products and services delivering real, tangible value beyond pure speculation.
Also, I do not think all bubbles are bad. The dot.com bubble led to tons of capital flowing into tech- forcing innovation, education, and infrastructure investment. We all, globally, are reaping the benefits of that bubble.
The .COM Bubble was Massive
The crypto bubble does not approach the money levels that fueled the .Com bubble. In 1995–2001, the bubble was fueled by global equity markets, global debt markets, global M&A markets, and global derivatives markets all explicitly backed by a USD printing press (that’s what “Dollar Denominated and US Regulated Public Equities” means).
Grandma’s pension fund was pouring into the NASDAQ. The S&P went on an M&A spree backed by inflated stock values. Yahoo bought Mark Cuban’s podcast company 15 years too early for $5.7B. There were so many trillions of dollars poured in over 5 years.
The Crypto total market cap is at ~$150B (inflated number based on thin transaction volume) and Nation-States have not started inflating and fueling this bubble, yet. So, it’s not the same.
Cryptocurrency is Global Too
Crypto is global. I don’t know what that means but I know it’s different. Chinese miners, Swiss legal framework, Singapore, Japan, Morocco, Russia maybe, USA, Zimbabwe, Venezuela…
If one country moves against crypto then VPN’s will circumvent this and make crypto even more valuable to those that are being hunted in that country.
Small countries that cannot print major currencies have a huge incentive to adopt crypto. So the US, EU, China are the only ones who can print fiat and expect anyone to care. The UK Pound is backed by a 60M person country and is now irrelevant. The Japanese Yen is also irrelevant.
The starfish that is crypto will react differently to local and global regulation, taxation, repression, and promotion. It won’t look like the .Com bubble in this regard either except in that there was really zero regulation in both cases, just greed and shoving your face in the punch bowl. Bubbles always require a failure of regulation to overheat.
How will Crypto Correlate with other Assets?
I don’t know how crypto will correlate with real assets when the next global depression happens.
Gold and stocks move opposite from each other until things get really bad and then everyone sells off everything.
Many people will sell off their $1,000 or $10,000 or $100,000 of crypto in a panic. Many people have put in money they cannot afford to lose. That person might be a trucker in Alabama, a hedge fund trader in Greenwich, or a crypto-miner in Beijing- but in all cases they are leveraged to the hilt and cannot take nor sustain a bad hit. They have no conviction and they will have to sell early.
Some people will sell to capture gains because they’ve made 3000% in 12 months in Ethereum. Some will sell because they bought out of ignorance and greed and that mindset will quickly turn to fear. Blockchain can’t handle large trading volumes so the network will freeze during the bank run. That will fuel more panic and more of a bank run. The water will drain from the pool and everyone will be naked.
Politics Matter, Competition for Limited Resources
Say there is a breakdown of financial and social cohesion in, oh I don’t know: Spain, Germany, France, Italy, Morocco, Iraq, Saudi Arabia, Thailand, China, Egypt, Ukraine, Russia, Mexico, Brazil…If there is massive unemployment and unrest for years starting in say 2019 and that keeps driving down capital markets then central banks will again conduct massive financial assets purchases and print money like crazy. Rich people will likely start buying into crypto again (advised by private wealth managers who no feel comfortable with the crypto asset class) and then crypto prices go up quickly vs. inflated fiat currencies. The relative movement is what’s important here. This flight of capital to crypto assets seems especially likely if massive taxation schemes get put in place or a nuclear armed power declares themselves a crypto haven.
A lot can happen. It’s certain that Germany will refuse to bailout the EU again when the next crisis happens shortly. It’s clear that the central banks of the US, EU, and Japan have no answers except helicopter money to get us out of the next downturn. And it won’t help. How will police and military and dictatorships and democracies respond?
So, Who knows?
I have no certainty about the prices of assets over any time horizon. 1, 5, 10 years.
However, I absolutely know that most ICO’s and cryptocurrencies will be gone in 3 years. The ones that survive will become giants, as with those that survived the dot com bust.
I also absolutely know that blockchain software protocols will flourish in a way far more impactful than cloud but perhaps less impactful than the invention of the Internet itself. Blockchain does have the potential to really change the world because the Internet is very, very centralized and our blockchain future “Blocknet” would be decentralized and that could have radical effects on how people form governments, allocate resources, and share information. But I have no idea.
We haven’t yet seen the “Titans of Blockchain” emerge to create that vision for the future and to organize the work of hundreds of thousands to produce things for the billions of us in the world. There are some bright leaders, but no one has yet really started to make waves like in the 1970’s and 80’s in tech. Those people will play a huge role in create the future too.
Of course there will be a price collapse (99% certainty from me) but I just don’t think the .Com bubble is all that informative here. But there is the real possibility that crypto prices skyrocket in times of fiat currency distress in advanced economies. We can only wait and see.
We live in the best time ever to be alive. Perhaps we also live in the most volatile time ever to be alive. It will all be fine if we keep our heads because there is plenty of sun, food, water, and land if we all share. But if we are still fighting over scarce (or pseudo scarce) resources- we’ll then, we’ve killed for less.
Twitter: Pat Larsen
Linkedin: https://www.linkedin.com/in/patlarsen1/
I have experience in military aviation, M&A investment banking, e-commerce, and blockchain&tech startups.
