Behind the speculative, non-conforming digital bubble
Yes, let us call it what it is — a financial bubble.
Cryptocurrency is a speculative bubble that has popped. Yet, this is far from the end of the drama.
Many online sources will have pointed out, Bitcoin’s price went from around S$1,200 in December 2013 to the lows of $200s in May 2015. More recently, BTC nosedived from $20,000 in December 2017 to lows of $5,800 multiple times this year.
As we near the 10-year mark of Bitcoin, the speculative bubble has in fact been declared dead over 300 times on one counter. The question that many people then ask is, “What next?”
What is a financial bubble?
First, it helps if we understand what constitutes a bubble, why it grows and why it pops.
A financial bubble describes the price of an investment that rises so sharply beyond its intrinsic value such that when people discover the true value, which is significantly lower, it triggers a massive sell-off that causes prices to plummet. The bubble has thus popped with prices falling as sharply as it has risen. Bubbles grow as a result of people’s unrealistic expectations and overly hyped up valuations.
In the growth phase, there is usually an overly optimistic and exuberant view towards the value of the asset. There are a number of contributory factors — lack of proper valuation measures, investors’ contagious euphoria, manipulators pumping the market.
Be it the Tulip Mania, the Dotcom bubble, or the housing bubble, they all manifested signs of a misguided and hyped up investors market. Likewise, the cryptocurrency market had its phases of rapid growth where investors sentiments were overly positive.
Side mention: There is a similar sense of optimism in the US stock market with an ongoing bull run that has lasted almost 10 years — a one-way growth, albeit a slow and steady one.
Pop The Bubble
Back to the crypto-bubble, the 2014 decline in Bitcoin prices can be largely attributed to the closing of the Silk Road, followed by the collapse of Mt Gox. The more recent bubble burst is probably due to the unsustainable ICO (Initial Coin Offering) fever.
The housing bubble was held loosely by subprime loans; the Dotcom bubble was sustained by overly valued tech companies. These all came crashing down when the market realised that they have just bought the hype, and that the assets that they have acquired are in fact worth lesser.
Of course, it is easy to tell on hindsight what went wrong, and how we should have seen it coming. There and then, what was going through the minds of investors before the pop?
The Visionaries See The Gold
One tell-tale sign of a bubble that many people speak of is when your dentist, your hairdresser, your cab driver, or a random stranger from the road asks you if you have invested in ‘it’. When everyone starts to see the vision, you are no longer a visionary.
Interestingly, cryptocurrencies are so complex that there are multiple dimensions for these visionaries to emerge. That is to say, the bubble grows, then bursts (or should I say, corrects), and then grows again with a new speculative story angle.
The 2013 growth was built on the belief of a digital cash that is not governed. The 2017 growth was built on the same belief of a universal, decentralised, digital cash but what is more, smart contracts and blockchain applied to many industries.
It should come as no surprise then if the next crypto market growth will be founded on current “applications” of universal money and smart contracts, but with a newly added story angle.
Whether it is mass adoption by the banks, mainstream adoption as a traded asset, industrial adoptions for Internet-Of-Things (IOT) and Artificial Intelligence (AI), these are all possible frames that suggest that cryptocurrencies can bring in that next bucket of gold. These are what the crypto visionaries of today see and might be also why they are still HODLing.
So, Buy Cryptocurrencies?
Having read all that, you might be waiting for some recommendations, or a call-to-action. And nope, I cannot guarantee that the market will grow again.
What I do see though is that real work is being done across many different projects. Many of them will fail but some will pivot, and a few will be wildly successful.
If and when they do, their fruits of labour will benefit all of us at little or no cost. It is just like how we have access to the Internet, to information on the World Wide Web today — we users will benefit and it will not cost us a bomb to use these services.
Hence, you do not have to be an investor to reap the benefits of decentralisation and digital, secured tokens. You do not even need to buy them now, especially if you cannot stomach the risk (all investments come with risk by the way).
If you do decide to buy some cryptocurrencies, it might be wise to read up on the technology and also on risk management because these will probably help you preserve your capital in the long run. Or you can simply pick up a copy of Rolling In Crypto, where I share more about what cryptocurrencies are, how to curate a crypto project, and how to build a diversified crypto portfolio.
Whilst most financial bubbles collapse and end, cryptocurrency is a non-conforming bubble. The crypto-bubble will grow again, because there is so much about cryptocurrencies that the layman do not know about yet, and there is so much potential to spin up something to create yet another market cycle. Yes, I believe there is a great deal of manipulation in the crypto market.
The best investment you can make is not monetary but investing in knowledge and learning.