The past few months have been a wildly spectacular ride for Bitcoin and other blockchain-related technologies. By the end of last year, Bitcoin reached almost $20,000 only to fall back to $7,000 in early February. Since then there’s been a steady climb to around $11,000, only to see a drop of almost 20% to $9,000 on Monday. This latest correction could be explained by the increased regulatory scrutiny in the U.S., attempted theft at one of the biggest trading venues and/or news that Nobuaki Kobayashi, attorney and bankruptcy trustee for the defunct Tokyo bitcoin exchange Mt. Gox, has sold 35,841 Bitcoin and 34,008 Bitcoin cash since September of last year to repay creditors. Kobayashi also revealed that he is planning to offload another $1.9bn worth of the cryptocurrency after he gains regulatory approval. With all this volatility an important question arises. What does the future hold for blockchain and is Bitcoin a bubble like many keep predicting?
Watching CNBC might give one the impression that Bitcoin is nothing more than a flick, a bubble that is already bursting, but is it truly so? Has it already reached the top and will Bitcoin slowly fade into oblivion? While the CNBC reporters are making these bubble claims without any semblance of understanding of cryptocurrencies, blockchain or bubbles, they might be onto something.
Firstly one needs to understand what an asset bubble truly is. A bubble could be defined as an economic cycle characterised by the rapid escalation of asset prices, followed by a swift contraction. It is created by a discrepancy between the fundamentals, the current application and the future potential for disruption.
Let’s take the early 2000s Dot-com bubble. The potential for the new technology called World Wide Web was immense. It threatened to revolutionise every industry one could imagine, starting with new ways of commerce to peer-to-peer connectivity. The commercial growth was set off by the release of the Mosaic web browser in 1993, however it took another four years for the households in the US to start adopting the technology and, even then, only around 35% of US households were using computers, compared to 15% in the early 1990s. By 1999 the six biggest tech companies were valued at $1.60trn, a staggering 20% of the US’s GDP, and by 2000 NASDAQ peaked at 5,048.62. Yet during the year 2001 it all came crashing down, erasing 78% of NASDAQ’s value.
Today, blockchain technologies threaten to do the same. New applications as the Internet of Things, peer-to-peer payments, smart contracts or better supply chain management can revolutionise the world’s economy, and they might, but then again, maybe not just yet. Even though one can see some large institutions adopting the new exciting technology, most are still only considering it or not even acknowledging it. New technologies such as cryptocurrencies, with their potential to disrupt the hundreds of years old banking system by providing a new means of storing value far from the reach of any governments, are still far from being considered a viable substitution for fiat money and thus their rise to fame has mainly been fueled by speculation on their potential. This discrepancy between the actual use and the potential create an ideal breeding ground for a massive bubble and don’t be mistaken: this is a bubble.
So now that this bubble has been established, does that mean one shouldn’t invest in the new technology, stay behind and watch the hype train leave and subsequently crash? No – bubbles are, one could argue, a natural component of today’s economy, just simply another cycle of boom and bust. Therefore, asking if this is a bubble is an inherently wrong question and one should rather be asking: How big can it get?
During the dot-com bubble the only people that invested were large institutions, professional investors and brokers, but today anyone with access to a phone with an internet connection can buy or sell cryptocurrencies or directly participate in initial coin offerings in a matter of seconds. Surprisingly enough, most crypto investors are not professionals. Large funds are steering clear of the crypto-craze and so do the Endowments and foundations. Only about 2% have entered the digital market so far and 96% are not investing, nor have any short-term plans to do so. The volatility in the crypto market could thus be attributed to the massive amount of usually contradicting information online, which results in panic sales and massive buys, and to the sheer number of coin exchanges with zero to no regulation which creates the perfect environment for market manipulation and insider trading which, no doubt, is happening.
Most of the public today have no idea about the underlying technology behind Bitcoin and they don’t really understand the value of blockchain. It might take years before a mass adoption of this technology will be seen, but when this happens, the market capitalisation might skyrocket due to all the institutional money pouring into the market and the crypto bubble just might outgrow all the preceding bubbles. After all, anyone with a phone and internet connection can participate.
On the other hand, It is also possible that people have learned their lesson during the past bubbles and will be more cautious. Maybe the fact that anyone can invest will keep the valuations rational. Maybe blockchain will revolutionise all the sectors without the preceding bubble. After all, anything is possible and Black Swans are impossible to predict.