Updated: Sep 1, 2018
So in my opinion, the answer to that question is no, cryptocurrencies are not in a bubble in the traditional sense. It may seem like a bubble to some on the outside who don't have a clue what a cryptocurrency is let alone what they and the technology behind them have to offer. They just see the massive increase in prices that we have seen this year, so to them, the bubble label seems to fit. For others, it is a convenient way to discredit cryptocurrencies. Afterall there are some people who have a lot to lose if cryptocurrency use does become mainstream. So if you are powerless to stop them about all you can do is try to smear them by claiming there is nothing to them, they do nothing, they are nothing but a fraud or a Ponzi scheme.
In my opinion, the biggest problem with the bubble argument is that most bubbles are driven by nothing but hype. There is nothing behind them to justify the elevated prices, the asset in the bubble really has very little intrinsic value, which in the end is why they go bust. This is not true of cryptocurrencies, Bitcoin and many of the top cryptocurrencies are much more than just digital money, they are backed by a revolutionary technology. The blockchain is a technology which in my opinion will change our world just as the internet has. Being used as a digital currency just scratches the surface, I believe that this technology will have uses that we cannot even comprehend at this time.
Cryptocurrencies also offer a way to level the playing field for those in this world who have been left behind by traditional banking and monetary systems. There are literally billions of people on this planet who have very limited or no access to banking. Decentralized cryptocurrencies will give them a chance to join in with the rest of us who have been privileged enough in our lives not to know what that is like. Anyone with access to a $20 cell phone will have the chance to make global financial transactions along with the rest of us, I believe this alone gives cryptocurrencies immense value.
I really think that what the cryptocurrency markets are going through right now is very much like the internet bubble (dot-com bubble) of the late 1990's. I believe where we are at now is equivalent to 1996 in the dot-com bubble, which went on for about 5 years before bursting / correcting. There were many technology companies that went bankrupt when the dot-com bubble finally burst, in 2001 alone there were over 537 companies that failed. I can envision a similar path as a possibility for cryptocurrencies, with the rapid expansion we have seen in the market, people (scam artists) have come in looking to take advantage of the millions or billions of dollars that are floating around the crypto market. There are many ICO's which are outright scams, they get a cool looking website and write up a white paper that sounds great but other than that there really isn't anything behind the company. Only the strongest companies survived the internet bubble and I believe it will be the same for the crypto markets. I also believe that even if we do experience a massive bubble and burst in the cryptocurrency markets they will survive, just as the internet bubble bursting didn't kill the internet.
Now when I say that cryptocurrencies are not currently in a bubble, I am not saying that they are not overvalued at times. All you have to do is study the Bitcoin price chart and you will see many places where the price got way ahead of where the technology was at the time. There are many instances of huge increases in price followed by severe corrections. By my count just this year alone (2017) there have been seven price corrections of 25% or greater with two of them over 40%. All of these corrections, in my opinion, are very healthy, it is the markets way of self-correcting when prices get way ahead of themselves. When these huge price surges are occurring the price chart looks ridiculous with the price line going almost vertical, just as we have witnessed Bitcoin and a few other cryptocurrencies do recently. But as time goes on and you look at these areas of the chart from a long-term view they appear as nothing but small bumps on the chart.
2013 Price Spike
Early 2017 Price Spike
My opinion is that a year or two from now when we look back at the price explosion we have experienced this year it will also appear as just a small bump on the price chart.
Instead of a bubble, I believe that cryptocurrencies are following an innovation S-curve and I believe we are still very early in the curve. I would say we are somewhere near the lower vertical dotted line between innovators and early adopters (see image below). This is the area where the curve really starts gaining elevation at a rapid pace, just as Bitcoins price has and it can continue for quite some time.
Also looking at this Rogers Bell curve (the technology adoption lifecycle) I believe we are still in the early adopter's phase.
I think it helps to get an idea of the growth potential of the cryptocurrency markets if you compare them to the traditional financial markets. When you do you will see how even though they have experienced explosive growth this year they are still minuscule in comparison. First, let's look at the Global money supply. The total Global money supply, M1 (narrow money) plus M2 (broad money) = 127.2 trillion. The total market capitalization of the cryptocurrency market is right around 500 billion dollars, so that's not even 1/2 of 1 percent of the Global money supply.
So next let's compare the cryptocurrency market to the Forex (foreign exchange) market. All of the cryptocurrency markets together do a combined trading volume that averages around 35 billion dollars a day. The Forex market daily trading volume averages 5.2 trillion dollars a day, that is over 148 times the size of the crypto markets or a little more than 1/2 of 1 percent.
As another comparison, let's look at the crypto markets compared to the derivatives market, examples of derivatives would be Options contracts, Futures contracts, warrants, and swaps.
As we said before the total crypto market cap is around 500 billion, The total size of the derivatives market is a little hard to quantify, but a low-end estimate is 544 trillion and the high-end estimate is 1.2 quadrillion!
So even with the huge expansion, we have seen recently in the crypto markets we are still a drop in the bucket compared to the overall financial markets. As you can imagine if only a few percent moved from these other markets/sources into the cryptocurrency markets the prices we have today would be nothing in comparison. So to those who say Bitcoin and the cryptocurrency markets as a whole are in a bubble, that is just wishful thinking on their part. Cryptocurrencies are still in their very early days and have a lot of expansion ahead!
Until the next blog,