Is Crypto Really in a Bubble? (written in May 2019)
0xCa90
February 6th, 2022

The 21st century is a comeback for the nerds. In the 2000s, landowners and manufacturing tycoons never would have imagined a bunch of nerds with their intangible codes could become some of the wealthiest people on earth. They are the same people today who will never see cryptocurrency becoming a trillion-dollar industry.

Realistically speaking, if we compare the current stage of crypto to the dot-com bubble, it is even worse, isn’t it? For example, the companies being sold during the dot-com bubble, like Microsoft and Amazon had numerous services and tangible products, so I could buy a new computer from Microsoft, or a book from Amazon. So, in essence, every stock sold in that dot-com bubble could do a multitude of things. In comparison, at the moment, cryptocurrencies don’t have many uses or capabilities aside from just being mainly used for speculation. To sum it up, there was at least some utility in those websites, while there are no real uses in the crypto world today. The only explanation that could stand against the doubters is that the current life stage of crypto isn’t equivalent to the dot-com bubble in the late 90s. We are not there yet.

Why?

It is because crypto allows early-stage projects to be openly traded, eliminating the need for a primary market, which has brought additional volatilities that are unseen in the traditional market.

Due to the convenience of ICO and IEOs, the general public is able to invest in venture deals - the very early phase of a project. It has made crypto more volatile, and easier at achieving the ‘bubble phase’ due to the involvement of uneducated individual speculators; however, it is inappropriate to think that the “100x” moves we’ve seen are the equivalent of the dot-com bubble in 1999. In my opinion, we are currently residing in the “later stage” of the start-up financing cycle. The difference is that the investors in crypto today are fueled by the uneducated public instead of institutions. This is an important note.

There are three indicators that the price recovery in crypto will happen sooner than later:

  1. Today’s unconventional monetary policy
  2. The time horizon of previous rallies
  3. Number of speculators and the total market cap

Today’s unconventional monetary policy

Like it or not, the mother of bubbles is the federal reserve. Low costs of funding are extremely bullish for long-duration assets like growth stocks or crypto. If we compare the monetary environment right now to the environment during the 2000s, the low-interest rate monetary environment currently is much more favorable. We have entered a constant low-interest rate era, where inflation is stable, and the economy is not overheated. The central banks tend to keep the interest rate low, to maintain the “status-quo”. There is a high chance that we could even start using Modern Monetary Policy, a new theory that suggests the Fed should not worry about government deficits, and it should freely print money to stimulate the economy.

The dot-com bubble’s time horizon indicates that the crypto bubble is only in its early stages

During the dot-com bubble, the value of tech stocks grew exponentially with the technology-dominated Nasdaq index rising from under 1,000 to more than 5,000 between the years 1995- 2000. You might find that only a 500% increase is nothing compared to the return in crypto, but this is only for the secondary market, which is the last stage of the start-up funding cycle. In reality, the returns made from the early stages of investment, or the primary market, are much more significant. You see, crypto’s return is only absurd for the public eyes because this is the first time the public can invest in an early-stage venture bet. Aside from bitcoin, which is more like digital gold in the blockchain world, the best proxy for determining the magnitude of the bubble is the performance of “shit coins” like dogecoin. How long have they been around? About 2 years on average. Most major ICOs happened in mid-2017 and quickly failed after just 1 year of rallying. In comparison, the dot-com bubble crashed after 5 years of rallying. Therefore, timewise, we are far from the stage that the 1999 dot-com bubble was at.

Number of Speculators and the Total Market Cap

One conclusion about what a bubble is, at the time it ‘pops’, those involved may suffer severe consequences and other negative ramifications. As a proxy, during every major bubble, the chair of the Federal Reserve has always come out and addressed the concerns with the market. This happened during the dot-com bubble in 1999, and the financial crisis in 2007. However, when looking at the overall size of crypto, it pales in comparison. Yet even at its peak in 2017, it wasn’t warned by the fed as the crypto market was not considered to be harmful to the economy in the big picture. What’s astonishing is at the current point in time, it is not yet even considered to be an asset class, let alone a massive bubble, and it is far from popping like the 1999 dot-com crash.

My Thoughts on Cryptocurrency and its Future

I believe that crypto will grow substantially because it has the capabilities that more traditional assets are unable to utilize. They are as followed:

  1. Crypto can transfer ownership without a market 24/7, while assets such as gold or stocks are limited to market hours.
  2. Crypto (Bitcoin) can be allocated as a non-correlated diversification for asset managers, and it is utilized as a put option for the current financial system.
  3. Crypto’s seizure-resistant nature could be useful for many countries to use as a way toescape its country’s capital outflow restrictions, and its ability to hedge against any government risks.

Crypto will be a globalized phenomenon as we have never seen any asset that could be bought and transferred anywhere with ease, and the upcoming crypto bubble will be the biggest bubble in human history because of that. Also, given how small it currently is with a market cap of $200-$300 billion, it will take roughly a ~20x return to make it comparable in size to the dot-com bubble’s market cap at its peak. I would not be surprised if one day the market cap of the crypto bubble exceeds the dot-com bubble’s market cap at its peak. Just ask around, how many of your friends know what crypto is, and how many have bought it? How many of your friends think crypto (bitcoin) is a scam? If your average friend believes that crypto is a scam, is it a bubble? Since when are average joes right on price predictions? Throughout the history of bubbles, they have always busted after some type of “mainstream adoption”. For example, when your parents or grandparents decide to pour their life savings into one speculative asset because everybody says it’s good. The bubble bursts when there are not as many speculators who would take the risk to buy into the speculative products that promised high potential earnings and profits in the future, and the number of sellers holding these worthless financial products grows. In reality, we are just very far away from that kind of adoption in the crypto market, period.

Conclusion

The bottom line is, if you believe that there will eventually be killer applications and real-life adoptions for crypto but are simply concerned that the price will not recover for another ten years like what happened during the dot-com bubble, there is no need to worry as it may recover faster than you would expect.

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