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Part 1: Is the market in a bubble?

Part 1: Is the market in a bubble?

The cryptocurrency market stands rather uniquely as one that has been labelled as being in a bubble for nearly a decade now. But is it really? In the following two pieces I will list the arguments for and against.

There are some indisputable facts that suggest that yes, the market is most definitely in a bubble.

People point to rising prices as proof alone – and the rates of increase are bewildering, a rare phenomenon of sustained and rapid growth. The market has grown by thousands of percent in just a year. Bitcoin has grown from a fraction of a dollar to topping out at the $20,000 mark. Ethereum has risen 20,000% in 12 months, RaiBlocks moving over 10,000% in a single month. As of today there are 42 (a dip from earlier this week) cryptocurrencies valued at over $1bn.

None of this would really matter if the price growth was matched by an accompanying expansion in technology usage. But there is no real sign of this equivalence. Even a coin such as Monero, which has a clear use (buying services and products you would rather keep private over the internet) has a fairly low transaction rate, hovering around 6-7,000 transactions a day. With an average transaction fee of $10 (historically high – it is normally more like $2-3), this means total transaction fees of c. $60-70,000 a day. Its market cap is $6bn.

And Monero is one of the least egregious displays of this disconnect. The likes of Tron and Cardano lack a functioning product yet have been top 10 and top 5 coins respectively, with Cardano peaking at over $30bn market cap. Coins such as Verge (tiny transaction volume) have seen huge increases thanks to nothing more than the tweets of a hacked account/visionary genius/paid shill/mad man. Dentacoin, which will not release any product until late 2018, hit a market cap of nearly $2bn this week. Dogecoin, literally created as a joke, today sits at a valuation of $1.5bn. Even cryptocurrency companies with solid technology, such as Ripple, do not require their banking partners to use the XRP token. Even a more solid protocol such as Ethereum, which does have many competitive advantages, has proven thus far unable to scale to a level necessary to justify a $125bn valuation.

And therein lies the issue. Price is driven by hype, not news. It is driven by speculation, not fundamentals. There is no reason for any of these tokens to hold the valuation they possess currently. More pertinently there is no need – Ethereum functions just as well with a low cost as a high one, and it allows for companies to run private chains at zero cost. Nearly a decade on, none of these cryptocurrencies can really boast of doing anything that has changed much.

Perhaps the greatest achievement in the space has been that of Ethereum acting as Kickstarter on steroids. There is no greater tool for crowdfunding than to conduct an ICO. And the best thing is, nearly every ICO has been a winner. You could throw a dart at the top 1000 list and likely come out with a profit. How can we square this with claims that it is a rational market driven by technology, not speculation?

The mania is not confined to just listed cryptocurrencies. Normal companies have seen their fortunes altered by adopting blockchain technology. A cigar firm jumped 2,000% in a day after announcing its intention to enter cryptocurrency mining. On-line Plc changed its name to On-line Blockchain Plc and saw its shares jump as much as 394% on daily volume that was 8x higher than the entire year’s trading prior to that. Citibank analysts commented that “Bitcoin is now so popular that it has potentially started to drain retail liquidity away from the largest stocks”.  

Most market participants don’t understand the market. Most cryptocurrencies are useless. Even the good ones aren’t being used anywhere near enough to justify prices. The impact on humanity thus far has been minimal. Speculation and hype of what a cryptocurrency could be is not just fully priced in but likely overvalued, and that hype is all that sustains the prices. What about the market doesn’t reflect a bubble?

Go big or go home

Go big or go home

The Global Financial Crisis and cryptocurrencies

The Global Financial Crisis and cryptocurrencies

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