It has been a battle between bulls and bears in the crypto space of late. One minute the market cap is going up, with possible indications of a bull run and the next prices are going down. Most newbies who entered the market at all-time highs in late 2017 would probably have sold their digital assets at a loss or concluded that cryptocurrencies are not worth investing in (I would too if I didn’t understand the dynamics of the market).
Critics for apparent reasons have likened the cryptocurrency craze to the dotcom era because the last year has seen the prices of tokens rise by tens and hundreds of times their original value. Bitcoin is not the only cryptocurrency that experienced phenomenal growth. Other altcoins like Ethereum, Ripple, Cardano, Stellar, and NEO, to mention a few, buoyed to new heights because investors did not want to lose out on the action. At the peak of the market, the total market cap was almost $800 billion; this was as at January 2018.
It is only natural to try to understand new events using the past. For this reason, the somewhat nascent crypto space has been viewed through the lens of the dotcom era in the late 1990s and early 2000s, primarily by traditional investors. The likes of Warren Buffet have been quite vocal on how bitcoin and cryptocurrencies, in general, are bound to fail. Moreover, you can’t blame them. The crypto market is still laxly regulated, heavily manipulated, and I can name a few companies that jumped on the crypto train to increase their profitability, similar to what happened during the dotcom era. Sadly, the aftermath of the so-called dotcom bubble brought the end of hundreds of companies, as well as investors losing their money. This article is an unbiased opinion of what I think about the crypto space; is it headed down a similar path?
A Nascent Technology
Irrespective of what anyone says, I think, it is still too early to judge what blockchain may metamorphose into. I mean who would have imagined cars running on electricity, or the world becoming a global village, woven on the fabrics of the internet? Similarly, the crypto market can still be considered a frontier – it is barely 10 years old, and even in its infancy stage.
Blockchain as a technology is already recording significant strides and is beginning to gain wider and gradual adoption. Even though the market is still loosely regulated, there are still a few regulations to keep participants in check. Governments and regulatory bodies are stepping in, and some sanity is being restored to the market. For example, exchanges who could not meet up with KYC and AML requirements in Japan have been forced to shut down.
Despite government efforts to regulate the space, there’s no arguing the fact that the market still relies heavily on speculation. In August, many people stocked up on their favorite cryptos in anticipation that the U.S. Security and Exchange Commission, SEC would approve the application for ETFs. Sadly, this didn’t happen, and the market plummeted back into a sea of reds. The truth is that most crypto projects are yet to deliver significant real-world value. Late last year, I joined the bandwagon and took a position in Cardano after researching their team and what they were trying to achieve. At that time, they had no mind-blowing minimum viable product, MVP. This same applies to hundreds of cryptos in the ecosystem.
News, speculation, and regulation are some of the underlying factors driving the prices of cryptocurrencies. It is also worth noting that support can quickly shift from one project to another (loyalty is hard to come by, after all, we all want to make profits).
It is also hard to understand and predict how events would impact the market. For example, one would have expected that after the U.S. SEC rejected 9 exchange-traded funds, ETFs, the market would be bearish. Interestingly, there was no significant reaction immediately after their decision. Also, considering China’s rigid stance on blockchain projects, many would have expected China-based blockchain projects to have a hard time. Surprisingly, the initial ban on ICOs has helped projects like NEO.
Understanding the Critics
A bubble is formed when an asset is being traded at a price that is significantly higher than its intrinsic value. Many cryptocurrencies are overvalued, even though they have close to zero product to back up their valuation. Take Dogecoin, for example, I am still confused about the usefulness of the project, but its market cap managed to reach over a billion dollars at its peak. I see no reason why a coin called “Rabbit Coin” or “Trump Coin” should be on the blockchain and increase by over 200% in less than 24 hours. With price fluctuations and manipulations such as these, there is a valid basis to dubbed what’s happening in the cryptocurrency space a bubble. As such, you can’t blame critics who compare cryptos to the dotcom bubble. They are both disruptive technologies, and they are exhibiting similar buildup of events.
Let’s explore some of these similarities.
Disruptive Technologies: The internet and cryptocurrencies are both disruptive technologies. The advent of personal computing, as well as commercial internet service providers, fueled the consumer market for internet companies. There was rapid internet adoption in the 90s, and most companies wanted a piece of the cake. By launching an internet-based product, companies showed that they were in on the trend. Similarly, blockchain technology is garnering increased recognition from heavy players. The idea of having a decentralized, relatively cheaper, and immutable system appears fancy. Although blockchain has been around before this cryptocurrency boom, which rode on Bitcoin, traditional institutions are legitimizing the technology by carrying out blockchain projects.
It is not uncommon to hear statements like “blockchain will change the world as we know it”, “it will knock off traditional financial systems”, etc. The same was said about the dotcom era. While this has happened in the sense that it is hard to see anyone purchase a newspaper on the road, or buy a video cassette to watch a movie, the revolution came in an unexpected form and was somewhat gradual.
The Explosion of Projects: Both events have seen the rise of numerous projects, some of which I consider irrelevant. Everybody then and now is hoping to capitalize on this new tech. To put this in perspective, I could wake up tomorrow, call my developer friend, create some social media channels, pay someone on Fiverr to write a whitepaper, and run some sponsored ads for an ICO. That’s as easy as it gets.
During the dotcom craze, many companies were founded. In 1999, there were over 450 initial public offerings (IPOs), most of which were tech companies. By March 2000, over 4700 companies were trading on Nasdaq. From just Bitcoin, Ethereum, and a few other popular cryptocurrencies, they crypto market has grown to over 1900 coins and tokens, according to CoinMarketCap.
What I Think
Although the cryptocurrency space has displayed similar features as the dotcom bubble, it is expedient to clear the air on this issue. If I am to quote the CEO and co-founder of Eden Block, Noam Levenson:
“So, the real question is not: are we in a bubble? However, rather, how big will the bubble get? If we respect the natural evolution of disruptive technology, then we must understand that with every massive speculative run-up, there is an equally massive crash. From the tulip bubble of the 1600s to the Internet bubble only 15 years ago, the crashes are inevitable. Thus, the question is, what can we learn from past bubbles, and how much can they guide our actions within the cryptocurrency market?”
The apparent truth is that most projects will not survive in a well-regulated market with stiff competition. If top brands like Nokia and Blackberry can lose their position with brands like Apple and Samsung, then we should naturally expect some sanity as the market begins to mature.
Blockchain projects cannot be taken in exact comparison with dotcom companies since the business landscape has changed to an extent. Taking Pets.com as a case study, despite the novelty of the idea, their business model was poorly executed. They had no independent market study to confirm sustainability or profit. Yes, just like the example I gave above, a bunch of individuals can come together and create a crypto project without considering so many variables. Also, this is why they will fail in the long run.
In conclusion, it will be unfair to dismiss blockchain tech and tag it a bubble. After all, the like of Google, Facebook, and Amazon are all products of the dotcom era. Nonetheless, it is necessary to enter into the crypto space with caution, especially when it comes to trading and investing in ICOs. The similarities between both techs should serve as a lesson to prudent investors. Do not get carried away by all the hype.