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The Cryptocurrency Bubble

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Is Cryptocurrency a Bubble?

A bubble can be defined as:

“The trade in an asset at a price or price range that strongly exceeds the asset’s intrinsic value.”

Although it’s hard to assign crypto assets an intrinsic value in the absence of valuation models that are used for other asset classes like stocks, crypto assets definitely came down significantly since the end of 2017, which most would consider a bubble.

During the crypto craze of 2017 and early 2018, the total market capitalization of crypto reached $800 billion. As mentioned, there was no real way to assign crypto some sort of inherent value, but the fact that there was no use for most cryptos at the time aside from speculation, it’s fair to say that $800 billion was a price range that strongly exceeded any sort of intrinsic value.

As of writing, there are far more uses for crypto than just speculation, and these use cases continue to grow. For example, the rise of decentralized finance (DeFi) in 2019 gave rise to many blockchain versions of traditional financial services like loans and derivatives.

cryptocurrency bubble 2013
From August 2017 to January 2020, the value of crypto assets locked in DeFi smart contracts has gone from $4 to $687.1 MILLION. Source: DeFi Pulse.

On top of crypto assets and the underlying blockchain technology expanding their utility, much of the irrational exuberance from the 2017 cryptocurrency bubble is gone, with mainly only true believers in the space remaining.

Therefore, while crypto definitely has had its bubbles, such as in 2017, 2013, and a few times before that, and will likely continue to do so, the industry in itself is not a “bubble” and has survived through various price-related booms and busts.


When Will The Cryptocurrency Bubble Burst?

If you’re talking about one of crypto’s various speculative bubbles, the most recent one already burst. However, cryptocurrency itself likely isn’t going away. While the industry only really became part of the mainstream consciousness in 2017, the industry has been around for more than 10 years now.

If blockchain and cryptocurrency were meant to fade into darkness, they probably would have done so by now.

cryptocurrency bubble - bitcoin has been called dead more than 350 times
According to the crypto blog 99Bitcoins, Bitcoin has been proclaimed “dead” more than 350 times. Image credit: Bitcoin Art

Dot Com Bubble vs. Cryptocurrency

A comparison people will often make is comparing crypto to the dot com bubble, which was the epic Internet stocks bubble that took place from the mid-1990s to the early 2000s in the US.

At the time, many were skeptical of this emerging technology called the “Internet” - you know… that thing you’re using now to read this article ;). Critics included “Nobel Prize Winner” “Paul Krugman”, who said that “By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.” Krugman is also a known critic of Bitcoin, the most famous cryptocurrency.

Newsweek, a popular American news magazine, also published an article about the Internet, saying how it wouldn’t live up to its promises:

Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic. Baloney.
The truth in no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.
Nicholas Negroponte, director of the MIT Media Lab, predicts that we’ll soon buy books and newspapers straight over the Internet. Uh, sure.
Then there’s cyber-business. We’re promised instant catalog shopping–just point and click for great deals. We’ll order airline tickets over the network, make restaurant reservations and negotiate sales contracts. Stores will become obsolete. So how come my local mall does more business in an afternoon than the entire Internet handles in a month?
Jeff Bezos, Founder and CEO of Amazon as well as the richest person in the world, would especially take offense with the quote about buying books on the Internet. Amazon started out selling books on the Internet. Now they sell…everything. Image credit: The New Daily

Nevertheless, while the Internet has obviously become a huge part of our everyday lives, many of the companies of the dot com bubble are nothing but a distant memory. Amazon was one of the few to survive but many prominent companies from the dot com era like Pets.com went out of business.

As with the various speculative crypto market bubbles, when the dot com bubble burst, it burst hard. Not only that but the big names you see today like Apple and Amazon suffered, too.

Dot Com Bubble vs. Cryptocurrency bubble - amazon now and then
Amazon stock peaked at ~$107 during the dot com boom, before plummeting all the way down to ~$6. Today, it trades near $2,000. Source: Yahoo Finance

Similar to the dot com bubble, it’s likely that many crypto assets will eventually go bust.

Bitcoin is one of the few crypto assets that’s stuck around throughout the years. In the 2013 cryptocurrency bubble, which was actually wilder in many ways than 2017 (e.g. BTC rose in price ~100x vs. 20x in 2017), the list of the top crypto assets looks very different from what it looks like today.

cryptocurrency bubble 2013
Aside from Bitcoin, Litecoin, and XRP, all of the top 10 crypto assets from the cryptocurrency bubble of 2013 are nothing but a distant memory. Image credit: Coinmarketcap

While we can’t know for sure what the future of crypto will look like, it’s probable that the ones left standing will be those that provide real usefulness to users.


Conclusion

So what’s next for the crypto space? More speculation driven booms and busts? Well here are just a few developments:

  • ICE, the company beyond the New York Stock Exchange, launched Bakkt, a place for big traders to trade Bitcoin and store their crypto
  • Steve Wozniak, Co-Founder of Apple, co-founded a blockchain investment firm
  • Brendan Eich, creator of Javascript and Mozilla, created Brave, a privacy-protecting web browser, that has its own ERC20 crypto token called Basic Attention Token (BAT)
  • The Bill and Melinda Gates Foundation uses blockchain company Ripple’s technology in payments software
  • JP Morgan created its own digital currency
  • Jack Dorsey, CEO of Twitter, believes that Bitcoin will be the currency of the future
  • Actor Ashton Kutcher donated $4 million in XRP in a few seconds to Ellen DeGeneres’ charity on live television

In case you wanted to know more like the launch of Facebook’s digital currency, the launch of government digital currencies like China’s central bank digital currency (CBDC), adoption doubling every year, and positive quotes about Bitcoin from the likes of Bill Gates, see our post on the future of cryptocurrency.

While crypto has definitely had its fair share of speculative bubbles, the underlying message is that real technology is being built here.

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