Crypto Can Be Experiencing a Bubble and Still Be Wildly Valuable
Full disclosure: I am not a financial analyst, an economist, or an “eccentric crypto-millionaire.” I barely even own any crypto. I find the entire evolution of the public discussion around it fascinating.
I’m just a guy who notices trends and write about them sometimes. This is a post that’s been percolating in my mind for a while and I wanted to get it out into the ether (no pun intended). This isn’t so much pro-or-anti-crypto as much as it is pro-“don’t use deceptive language.”
Whether or not cryptocurrencies are in a bubble is a question that comes across my twitter timeline on a daily basis at this point. Stories about people taking out mortgages to buy Bitcoin, an iced tea company and a marijuana company announcing the addition of “blockchain” to their names and their stock prices spiking in response, and the fact that joke-coin Dogecoin now has a market cap of over $1B USD all lead to even crypto-fans wondering if there’s a bubble and just how big the bubble is.
Before answering this question, it’s important to understand the assumptions at work in discussions around “bubbles” and what it really means for a sector of the economy or an asset class to experience a bubble. This might be less-important for asset classes that are difficult for a regular Joe on the street to access, like mortgage-backed-securities, but in the case of crypto, whether or not there’s a bubble looms large in the mind of somebody thinking whether or not he should put this week’s beer money into a coin on Coinbase.
Not Quite Like Stocks
Unlike a specific company stock’s price, there’s no “Bitcoin Inc.” or “Ethereum Inc.” that can shut its doors and go out of business if the value of the coin drops and “investors” start looking for the heads of executives. The “investors” don’t even get a say in the same way that major shareholders of a public company do.
Even if Bitcoin, or Bitcoin Cash, or Ethereum, or Litecoin, or any other coin that has teams across the world working on the project were to crash and drop to a few dollars/coin, there really isn’t a central organization that has operating expenses that depend on the ticker price. There are developers all over the world — yes, some of them working at companies — contributing to the projects and to the technologies. Even if a handful of those companies closes, it can still be rational for individual developers and small teams to keep working on the project if adoption means the price would rebound.
(This is ignoring inter-crypto drama about how many devs are working on which coins and how truly distributed those devs are…I’m not interested in that here.)
Still Pretty Young
One of the objections I’ve heard from more technically-savvy skeptics of cryptocurrencies is that we’ve had blockchain technology and cryptocurrencies for nearly a decade now and no normal people use services or apps built on that technology on a regular basis.
But this raises the question: on what timeline?
You can make the case that artificial intelligence is nearly 70 years old and we are only in the last decade starting to use regularly use services centered around that technology.
The ultra-quick adoption of other consumer technologies clouds our ability to see timelines in what might be a stronger context for lifetime adoption.
Venture, Not Value
Even if cryptocurrencies are in a massive bubble right now, how relevant is that question if just a few survive? Naval Ravikant made a useful distinction on twitter recently after a follower asked him about Warren Buffett’s dislike of Bitcoin (the day before I wrote this post, Buffett declared that we are near the peak of the crypto bubble).
A bubble implies that the asset is overvalued compared to its long-term value. Once investors see that, they pull back and there’s a contraction. Given that our timeframe for crypto might be way longer than some discuss and given that crypto doesn’t have an IPO-schedule or a quarterly-earnings expectation to meet, to even talk about it in terms of a bubble doesn’t make much sense to me.
Now, for specific individuals, if you want to make X% return on cryptocurrencies by Y date, then the bubble-talk may make perfect sense. If the market contracts next week and Bitcoin drops to $5,000/coin after you bought at $14,000 and you wanted to cash out in a year, you may be S.O.L.
The most compelling evidence to me for ignoring the “crypto bubble” talk is simple that…
The Internet Had a Bubble and It Is Still Here.
You could think of the Internet as a sector of the economy in 1999, or you could look at specific Internet companies. If you bought Pets.com when it IPO’d at $11/share, you’d be out of all of your money in just a year.
If you bought Amazon.com when it IPO’d at $18/share, you’d experience a 72x ROI just 20 years later.
The comparison between crypto and the Internet is probably the best one I can think of. In 1998, adding “.com” to a company name would make the stock price jump. In 2018, adding “blockchain” to a company name can revive a penny stock. In 1998, the Internet was seen as useful for ordering books or dog food and maybe chatting with friends. In 2018, cryptocurrencies are seen as useful for playing day-trader and making quick payments without a bank. In 1998, there was talk about how the Internet could revolutionize a ton of industries but little to back it up besides some eccentric nerds and their investors. In 2018, there’s talk about how crypto and blockchain technology can uproot industries but little to back it up besides some eccentric nerds and their investors.
Hindsight is 20/20, of course. Lots of investors a lot smarter than me lost money by betting on some .coms that weren’t Amazon or eBay. If I were asked “what’s the AMZN of today in your analogy?” the question would be hard to answer, especially with the foaminess and fog of war out there with get-rich-quick schemes posturing as altcoins and porn-company execs running off with ICO money.
But stop saying that crypto is or isn’t a bubble as if that were to indict it as a total waste of money and energy. You’re reading this on something that was the product of a bubble.
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