I compare the feeling of waiting for an economic bubble to burst to being on a long plane ride without any idea of what time it is. A non-stop flight from SFO to China is 13 hours and if you doze off for a short period of time, read for a while, doze off, but have no clock, it would be very easy to think you are much closer or farther to your destination than you actually are. That’s how I feel about the current crypto currency space. except, I feel like in this case, our plane might be flying into an interdimensional vortex, and may never land where we expect it to. Hell, if it does land, it might land on the same island that Oceanic Flight 815 did.
I find it hard to read anything from anyone that doesn’t believe we are in a bubble of some sort (whether good because it’s bringing attention to the space or bad because a lot of people are going to get hurt badly if/when it burst). And with that, I agree. We are in the run-up period (potentially in the very early run-up) of a cryptocurrency bubble.
The aspect of the argument that does differ from person to person is when (if ever) exactly the bubble is going to pop. You have some people like Chris Burniske saying that we are only about 15% of the way to the true start of the bubble
To be explicitly clear, I don’t totally agree with either of them.
“A bubble is an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.“
I agree that there has been a rapid escalation of asset prices in the crypto market. As the two charts below shows, the amount of money raised via ICO in 2017 and the increase in the cryptocurrency market cap in the past year has been staggering.
However, I don’t believe that the contraction to be associated with this bubble will be that large and I especially don’t believe that investors who have been conservative (as conservative as you can be when investing in a volatile asset class, that is) will be hit too badly, if at all. Over the past weekend, we saw a hit to basically every crypto currency when China unilaterally banned ICOs, however, as many noted on Twitter, it only (temporarily) erased gains from the previous week or month. If you are an investor who heard from your friends how much money they made over the past year in cryptos and then decide to plunge a large % of your personal wealth into cryptos, you are signing on for a lot of risks. If you have been conservatively investing early-on in projects over time, you will probably be in a good place, even if there is a bursting of this bubble. I say that because, for many ICO/Pre-ICO investments, you can invest at 20% - 50% of what the token actually starts trading at (Olaf talks about this in regards to capped ICOs in this podcast around the 39:45 mark). An example being 0x (ZRX token) which priced it’s (effectively 2x capped) ICO at ~$0.05, peaked a couple days after listing at $0.50 (10x) and now sits comfortably around $0.25 (5x). For investors in 0x to lose money, the token would have to effectively hit 0. For many investors (myself included) who tends to only invest at this super early stage, you are playing in an unfair game that has (effectively) unlimited upside and minimal downside (you can lose nothing but your initial investment).
The other argument for why we are either a) Not close to the bubble bursting yet or b) the bubble will never burst is because as Ian (and then Ryan and “Moonlaunch James”) said on Twitter, cryptocurrencies still constitute such a small fraction of global “Money” (loosely defined):
Or as this chart points out:
Cryptocurrencies, plain and simple, just aren’t touching as many people as the internet bubble did or as the housing bubble did. For all of the hype that cryptocurrencies have received this year, they are still a very fringe investment class, they are small (relative to other investment classes), and they are not "too big to fail” in the way that the banks were in the 2008 financial crisis. If the crypto currency market went to ZERO tomorrow with no sign of recovery: I speculate that the people who would be most hurt would be (in this order): Hedge funds and other institutional investors who made big bets (or bet the farm) on the industry, people who work directly in the industry, big time speculators, small time speculators, and then the few “mom and pop” types who invested a chunk of their savings because their kid told them it would be a smart idea . Unlike the housing crisis, the first, second, and third order effects of crypto currencies will not threaten “everyday Americans” in a widespread sense. Don’t get me wrong, if/when this crypto bubble burst, people are going to lose their shirts. However, it won’t be people we usually feel bad for in an economic downturn.
My other conclusion, that I am still thinking through, is why does this bubble ever have to burst? Of course, projects will fail (and that will be a great thing when the scammy ones do), but the idea that the whole market will fall all at once (or that Bitcoin will tank and bring the whole ship down with it) seems unlikely. It’s easy to compare the crypto currency market to other historical asset crises, but cryptocurrencies are different than any other asset class before them and in turn, might not follow the same overall rise and fall trajectory. Compared to other assets, crypto currencies are global, by default, and in turn, have a lot of parties (who would not normally deal with each other) all rooting for the same (or similar) outcomes. The present global success Bitcoin is feeling could be the first successful round of an iterated game between many global parties (Japanese speculators, U.S. investors and academics, and Chinese miners) in which multiple currencies and blockchains will flourish.
Time will tell on this one, but avoiding the markets altogether right now, is a mistake.