In April 2017, the total market cap for all cryptocurrencies was around $25 billion. Two months later, it crossed $100 billion – an increase of 300%. Bitcoin price surged from trading at $800 in January to $3000 in June. There are 882 cryptocurrencies currently listed on coinmarketcap – four times the fiat currencies in circulation. From Potcoin to Royalcoin we have them all.
At this point you can’t blame the skeptics who think we are currently living in a cryptocurrency bubble, especially when they point to dot com bubble. As it turns out there are drastic similarities between between the dot com bubble (or any bubble for that matter) and the one we are supposedly living in right now. Whatever goes up like a rocket, comes down like a rock.
Since the average age of people who are actively involved with cryptocurrencies is in mid 20s, it is safe to say most of them weren’t around during the dot com bubble.
It’s greed that drives bubbles. When people see fortunes being made from nothing they jump on the ship blindly, which eventually sinks. While people who are already invested in Bitcoin may be celebrating, this jump for newbies could be a disaster waiting to happen.
That being said, we must not neglect the fact that cryptocurrencies have only been around for 4 years, so it is very hard to predict if the market is in the bubble or maturing. This could be the beginning to a new internet. The harsh truth is, no one really knows how the market works and few can value them correctly.
Cryptocurrencies do raise some serious questions about nature of money and whether or not it should be decentralized. They are meant to bypass traditional payment systems run by banks. A libertarian dream. Some argue that the technology hasn’t been user-friendly enough for mass adoption. Even if it does work- not all the coins will be around for long. Only a few will stay and rest will fade away.
Recently Mark Cuban criticized the nature of cryptocurrencies, specifically bitcoin – saying it is in a bubble, and not, a currency at all. He is again referring to the dot com bubble here, but he is wrong – at least partly wrong. Bitcoin is indeed a currency. It’s because they can be used for three things: as a unit of account, a medium of exchange and a store of value. It’s just that they are electronic, a currency of different kind – but then again aren’t all the fiat currencies on our computers these days?
Unlike fiat currencies, bitcoin’s supply is limited 21 million to be precise, of which 16.3 million have been mined so far. Public opinion towards cryptocurrencies has always been divided. With the new surge in the market, opinions have become even more polarized.
Skeptics hinge on Bitcoin’s first impression as being a black-market currency and call this a bubble, while proponents contend that this is a global currency that is just going mainstream and can indeed go way higher. To give you some context, there are some people who think one day bitcoin could be worth $1 million a piece.
A bubble in itself isn’t really a bad thing. In fact almost every wave of technology has brought with it a financial bubble phase. For instance, Railway Mania in Britain. During this phase a lot of money flows into a sector which finances real innovation and accelerates the buildout of physical infrastructure. The same could be true for the cryptocurrency bubble.
Whether it be a bubble or boom, it hasn’t stopped Venture Capitalists to invest in the crypto mania. Everyone wants a slice of it. Aberdeen’s venture capital arm, which has about $1.8 billion entrusted in early stage funds, is considering investing in funds that hold blockchain-based companies and digital coins.
“Prices right now aren’t being driven by network usage, they’re being driven by speculation that tokens are going to appreciate. It’s a gold-rush mentality. The winners will be those who are really creating highly disruptive, network-based businesses.” said Denious, head of global venture capital at Aberdeen Asset Management Plc.
There were a lot of lessons learned from dot com bubble that investors today can take advantage of. Following are a few things every investor must keep in mind before investing in any cryptocurrency:
1. Understand the world at large and what’s going on with the markets. Stop herd like thinking and DYOR (Do Your Own Research)
2. Look beyond the vanity metrics. For instance, during the dot com bubble, pageviews were directly proportional to the funding you could get. Get a sense of where we are and look for metrics that point to actual adoption of the technology.
3. Never ever borrow to invest in a bubble. Don’t think that having a backup plan is a sign of weakness or lack of commitment. You should never be all in. Always have a safety net.
4. Watch out for scams. There are tons of MLM and pyramid schemes going on around cryptocurrencies. Get involved with the community of experts who are seasoned investors and filter out the obvious scams.
This will leave you with enough leverage when the bubble bursts so that you can again get involved at the right time and make some sweet profit.
The most important thing to understand here is that every huge market took lessons from when the bubble burst. Whether it be the tulips in Amsterdam or stocks of Wall Street. They took valuable lessons in how their instruments worked and fixed the problem. Until then it is a bull ride.
Similarly bitcoin and other cryptocurrencies are here to stay. But when the bubble bursts, which it eventually will, massive correction will take place and by then there is a good chance cryptocurrencies will get regulated and taxed in most of the countries.
