While I was writing this article, the total cryptocurrency market value just ticked over $85 billion. At the start of 2017, the figure was a relatively paltry $18 billion. Some quick maths will show that represents an increase of around 470% in the space of a few months, and naturally that has people running around screaming their head off about a bubble. But does this classify as a bubble?
The most (in)famous bubble is perhaps the tulip bubble which took place towards the end of the 1800s. Tulip flowers and seeds reached stratospheric prices before crashing down... hard. Time and time again, mankind has experienced several bubbles, with the end result being triumphant smart investors who pull out before the crash, and bagholders of the asset in question left with a trade gone terribly wrong.
Analogies can certainly be drawn to the current situation in crypto. A sharp increase in price, feverish enthusiasm and mentions on mainstream media can be indicators of a bubble. However, certain fundamentals are being forgotten; fundamentals which potentially skew the whole bubble argument altogether.
- Cryptos are nowhere near being mainstream yet. It is still quite difficult to profitably buy cryptocurrencies without at least an intermediate knowledge of IT and economics, and only a small percentage of businesses accept cryptos as a means of payment.
- Most crypto-projects are still in their alpha stages. And that includes Bitcoin, which hasn't even yet solved its scalability issues. Most recent projects promise a product-delivery date towards the end of 2018/start of 2019, therefore right now prices are mostly based on speculation. If the promises become reality, then that's a whole different stage altogether
- Most people still have no idea what Bitcoin represents. It's all too easy to be drawn inside the crypto-world and assume that everyone else knows what you know. Try asking someone on the street about what he/she knows about Bitcoin. When you get satisfactory answers on a regular basis, that's when you should start worrying about a bubble.
- Global connections. This can indeed potentially be one of the hugest bubbles ever in history, but I strongly believe we haven't even started yet. The reason is that we live in a world ruled by social media, where news can get around in an instant and hence no one can truly predict, with full confidence, when and how the crypto-train will stop. It might shoot off like a rocket to die off within a few months, or it might last longer than other bubbles.
- Cryptocurrencies have an actual use. Unlike some other bubbles, cryptocurrencies actively set out to solve long-standing problems thanks to innovative and ever-growing uses of the blockchain technology. While most of the cryptos in circulation might have a short shelf-life, others are good candidates for mainstream adoption.
The closest parallel which can be drawn to one particular bubble at this stage is the dotcom bubble which took place at the end of the millennium. All the ingredients above were part of the dotcom concoction, save for the influence of social media - and that should definitely not be taken lightly.
If the total dotcom market cap reached circa $3 trillion in value before bursting... what sort of heights can we expect the crypto-bubble to attain? Time will tell, but one thing is certain - there will be price consolidations, even downward corrections, but the road is long and cryptocurrencies do not look as if they will be stopped any time soon.