May 29th, 2017: there is no crypto bubble.
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I was surprised to read Albert Wenger’s “Some lessons I have learned from the Dotcom bubble for the coming crypto bubble”.
Why?
Well, the “coming crypto bubble” leaves no room for interpretation: for Albert (a very well respected VC and technologist), and for others, cryptocurrencies (Bitcoin, Ethereum, Ripple, etc.) are in a bubble, at the moment.
(by the way, I have interpreted Albert’s thoughts as mainly a set of (much needed) warnings for people that might get too excited about a “gold rush”, without knowing what they are doing. I might be wrong, of course.)
My definition of bubble (e.g. South Sea Bubble), or the similar definition of mania (e.g. Tulip mania), in my view, don’t really apply to what’s going on now to crypto.
Before I dig into some details, let me put out my usual disclosure: I own crypto assets (mostly Bitcoin and Ethereum), and therefore I have a vested interest in seeing their value or price go up. Therefore, you shouldn’t trust me. Apply your own judgement.
(At the same time, I own assets, and I will continue to do so, precisely because I believe there’s no bubble at all. Nassim Nicolas Taleb (not Warren Buffett) would call it “skin in the game”).
Why there’s no bubble, then?
Straight to the point: bubbles/manias are when the value of a certain asset is vastly inflated, and lost touch with the maximum real value that the asset can have in the real world. This is not the case with cryptocurrencies.
Instead of debating the theory of economic bubbles, let’s examine what’s the value that Bitcoin (and similar other cryptocurrencies) is currently providing, and see if that could be a bubble or not.
In the last 24 hours (roughly speaking, May 29th, 2017), the Bitcoin network processed ~350,000 transactions, paying ~$5,700,000 to miners which equates to costs of ~$16 per transaction.
The estimated transaction volume was ~$670,000,000.
You can find similar stats for Ethereum, here and here.
What these stats are telling us is that the Bitcoin network is currently offering tremendous value — the same value that gold gives us: it’s a fantastic store of value.
However, the network is NOT, at least currently, a mean to transact small amounts of money. I would never pay $16 in transaction costs to buy a $4 coffee in San Francisco, or a $20 taxi ride.
(and NO, the Ethereum network is not polluting the air, at least not directly).
We can open the debate on transaction costs, and die of old age… The short story is that there are both alternative cryptocurrencies that offer lower transaction costs, AND a active debates (such as SegWit) to improve Bitcoin in a way that would, among other things, reduce transaction costs.
So, you might say, it JUST provides store of value. That’s it? Yes, that’s it, I respond.
And what about Ethereum? Well, it offers many other things, but none of them had a huge impact in the real world… Until now.
Potentially, both Bitcoin and Ethereum can vastly improve the way we “move” money around, between humans but more importantly between machines. And that’s why the potential upside is so great… And that’s why more and more people are “buying” into cryptocurrencies.
As with any fast, complicated new development, there’s a lot of “wild wild west” happening — in the form of ICOs (Initial Coin Offering) and such.
I am not claiming that everything is safe, or a good bet. Quite the opposite. In a “wild wild west” situation, you should be particularly careful on where you are betting your money. And yet, the fundamentals of cryptocurrencies, which we might summarize as both Bitcoin and Ethereum, and already providing great value, and will only improve their impact in the world going forward.
Ten years from now, we will be looking at cryptocurrencies as the sparkle of a new technological revolution. There will be nation states adopting Bitcoin as their main currency. There will be millions of API calls per second paid for programmatically with Ethereum. Or, it will be all handled by the SimoneCoin, a revolutionary cryptocurrency yet to be invented, and better than anything else.
There is a chance that Bitcoin and Ethereum will be rendered obsolete by something else, and there is a chance that they will remain protagonist. If they do, we can safely bet that the value they provide will vastly increase over time.
That’s why I’m bullish on their value, and that’s why I don’t believe there’s a bubble.
Of course, BTC and ETH prices will fluctuate. August 1st, 2017, for example, is a very important date for BTC. Any move by the Chinese government deeply affects their price. And so on, and so forth. But in the long run, I fundamentally believe in the value of cryptocurrencies, and the change they can bring to the world.
If I’m wrong, I will vastly pay for it. That’s my skin in the game.
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