Do We Have a Cryptobubble?
Dotcom and Cryptobubble
First, the definition of a Financial Bubble:
"To trade with an asset at a price or range of prices that far exceeds the intrinsic value of the asset."
Speculative bubbles are notoriously difficult to recognize as they occur, but they seem obvious after they burst.
Let's understand the Dotcom Bubble
As we can imagine in the nineties, no investor noticed that he was inside a bubble and that it only took a small puncture so that his delicate membrane would break.
We can clearly locate it in the period between the years 1995 - 2000.
The dotcom bubble arose because of the speculative investment that was based on fashion. The abundance of venture capital funds led investors to place their money in new Internet companies during the 1990s with the hope that these companies would someday be profitable.
They did this without taking a cautious approach to using the Internet and without thoroughly investigating those companies without their own technology which abandoned fiscal responsibility and spent a fortune on marketing just to differentiate themselves from the competition. It was enough to put the word ".com" or "web" in the name of the company to ensure a very lucrative investment.
How the Dotcom Bubble Explodes
The 1990s was a period of rapid advancement in Internet marketing, which led to the greatest expansion of capital growth ever seen. While companies such as Intel, Cisco and Oracle boosted organic growth in the sector, it was the new dotcom (.com) companies that drove the stock market surge that began in 1995.
The bubble that was formed in the next five years was fueled by cheap money, easy capital, excess confidence in the market and pure speculation.
Investors ignored traditional investment fundamentals, putting their capital in companies that still had to generate income, profits and, in some cases, a finished product.
On March 10, 2000, the Nasdaq index peaked. Right at the peak of the market, several major high-tech companies, such as Dell and Cisco, placed huge sales orders on their shares, which generated a panic in sales among investors. In a few weeks, the stock market lost 10% of its value. As investment capital began to run out, so did the soul of dotcom companies with little cash. Dotcom companies that had reached market capitalization in hundreds of millions of dollars became useless in a matter of months. At the end of 2001, the majority of the companies of point com com quoted in stock market retired and billions of dollars of investment capital evaporated.
Comparing Past & Present.
Other Older Bubbles
In the 1630s, what is now known as the tulip bubble explodes in the Netherlands. It is estimated that tulip prices increased by 2000% in four months before crashing by 99%.
In the late 1980s, a huge stimulus effort by Japan catapulted its economy and led to a massive speculation known as the Japanese property bubble. . The bubble burst later in the early 1990s.
A Glance at the Business Life Cycle
We could compare the business cycle of technology-related companies during the dotcom bubble with the life cycle stage of technology companies today.
- In the 1990s, companies and industries related to technology were relatively new and consumers adapted to the latest advances.
- Today, most companies related to technology are in a mature stage unlike what happened in the late 90s.
- Frenzy buying or investment levels of current technology markets, crypto and Blockchain, are low compared to the 1990s when investors bet all technology-related companies to provide absurd capital returns.
- The dot-com bubble was formed when investors shifted their focus from gains to speculation and these speculations caused share prices to rise, thus market participants considered "normal" the levels of deviation of underlying earnings from the share prices. The underlying fundamentals of the current bull market are not similar to those of the dotcom bubble.
- Today, more than 90% of technology companies are generating positive operating profits, while at the end of the 1990s, less than 50% of technology companies were reaping operating profits. This draws a line between the two ages.
Despite some similarities, current market valuations do not represent the same level of risk that existed before the explosion of the dotcom bubble.
Do We Have a Cryptobubble?
The Crypto and Blockchain technology has had an exponential growth since the creation of Bitcoin on January 30, 2009.
Despite having a decade, it is still a speculative market. Misinformation is a day-to-day factor.
With the launch of the Ethereum network on July 30, 2015, the launch of the thousands of Altcoins that we know today begins. Any person or company can create their own ARC20 token. The Blockchain era was born.
This allowed, with the implementation of intelligent contracts, the creation of many briefcase companies who offered their innovative products and solutions, always supported by the total security, auditability and transparency of the Blockchain. Whitepapers launched everywhere where villas and castles were promised. Many of these companies made false offers, projects that only happened on paper and in those famous ICOs that in mid-2018 caused millions of losses and sowed distrust in the growing Blockchain market.
In the words of Rory Cellan-Jones, BBC Technology correspondent: "We are in the middle of a new bubble" of high risk.
"It would seem that the use of the Bitcoin or cryptocurrency label in any project is the current equivalent of adding the" dot.com "to any old business in the late 1990s."
So the real question is not: Are we in a bubble? But, how big will it be?
If we accept the natural evolution of disruptive technology, then we must understand that with each massive speculative increase, an equally massive fall will come. From the tulip bubble of 1600 to the Internet bubble only 15 years ago, accidents are inevitable. We must ask ourselves, what can we learn from the bubbles of the past and how much can they guide our actions within the cryptocurrency market?
"Those who can not remember the past are condemned to repeat it"
There are intrinsically human psychological factors that lead to speculative buying, they always occur regardless of the period of time, regardless of the asset. From the lady who goes to the automercado and buys dozens of products that she does not need, just because they are on offer, even the great WallStreet investor who places millions in an unknown company just because he is in "something" called Blockchain.
Equal But Different?
We could make the comparison "dot-com" with "cryptocurrency". Both driven by promising new technologies difficult to evaluate correctly. However, 2019 is not 2000. We should use the dot-com bubble as an actual risk metric, so that the future of Blockchain is not similar to that of the internet. We must consider that with Blockchain market penetration and adoption is exponentially greater, even if we talk about losses. WebVan's $ 700 million daily losses do not compare to Ripple's losses of $ 25 billion in 24 hours on January 8, 2018.
These fluctuations are the result of several factors:
- The access of investors to the cryptocurrency and the massive availability of information through the Internet favors the volatility of the cryptocurrency.
- The number of Exchanges, both centralized and decentralized, allows crazy arbitrage and market manipulation. Since there are very few regulations on the use of insider information and market manipulation in the space of the block chain, malicious acts can occur. A millionaire investor can easily affect the established balance.
- During the NASDAQ increase in the 1990s, investments could only be made through brokers and institutional investors; With the cryptocurrency anyone can participate, from wherever they are. You only need a device connected to the internet.
- This feature of cryptocurrencies, accessible to anyone, from anywhere, provided that you have some money and a cell phone was not possible in the year 2000, which could have provided a possible recovery of the market. On the contrary, Internet found accessibility barriers for investors, the difficulties encountered in sharing information quickly and massively, and the fact that dot-com investment was largely limited to Americans.
- As Blockchain progresses, it becomes clear that many of today's projects do not live up to expectations. The first failed Blockchain project could create a snowball effect.
- Digital asset markets may continue to fluctuate to the point where adoption brings stability.
Conclusion
It is also possible that Blockchain and cryptocurrency challenge all predictions, all historical models. Blockchain may transform all industries and never see a crisis like the one that dominated in the early 2000s. It is possible that Blockchain and cryptocurrency compete with today's stock markets. It is possible that decentralization is so radically different and successful that fundamentally changes the way companies and projects develop, the way humans interact psychologically with markets.
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Many people make the mistake to consider cryptos as an investment.
An investment is a vehicle that gives a direct return in the form of interests or dividends. Since cryptos do not provide that, it is not correct to speak of an investment.
For cryptos an increase of value only comes into life when people are willing to pay more for it than others. This is called speculation and speculation goes hand in hand with bubbles.
So I believe that yes we are in a speculative bubble but not all bubbles have to explode. If the demand for cryptos is great because they are usefull then it is an organic growth. If people buy cryptos but have no idea about them and just buy them to get rich quickly, then it's an unhealthy bubble that will sooner or later burst. Since cryptos are a bit of boths, I think that we will have an organic increase of value and bursting bubbles at the same time.
For us as investors or speculators, the important thing is to believe in the asset and to understand it. It is the long term that matters.
For me cryptos are an amazing tool and an interesting technology. However, I've never bought any cryptos. I just got some from faucets and clound mining. At the time it was worth very little but now...
Given that most cryptocurrencies have no intrinsic value, one can argue that their very existence is a bubble.
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Well elaborated this phrase. It wraps one of the main points of my post.
The value of each currency depends on the trust placed in it by its users and owners. Currently investors are very cautious when placing their capital. We are in a bubble, but let's hope it does not explode. Although many think that moment is imminent.
My dear @juanmolina, extraordinary brother work, great research. Congratulations!
There are all the possibilities that you describe, but your work makes it clear that there is a historical behavior in this type of events and that there is a very high risk that it is possible to repeat. Now I understand the advice of a friend who told me: It is safer to invest in your own formation and growth.
However, each investment has its risks and as they say in my country. "he who does not risk, nor lose, nor win" So you have to be clever when making decisions.
Thank you for sharing this great work, go ahead and do it very well.
In order to obtain benefits, you must take risks.
No market is totally solid or 100% reliable.
There will be those who think that investing in gold is more solid and reliable. But in history will be the Nixon Shock with the repeal of the "Gold Standard".
With the largest reserves of gold mined in the world, the US could change the value of this market at any time.
Given that the value of crypto is notional, the question to ask would be- Why is Bitcoin (And others) still gaining investors and users by the hundreds?
The answer to my mind would be two things
Constructively- People have come to trust these currencies as being carriers of value. More over they treat this as a hi-tec asset, maybe risky, but still an asset.
Negatively. Bitcoin and crypto-currencies represent something out of bankers' reach. Bitcoin could become the "Batman" to the villainous Jokers- the Banks and the Central Reserves which have completely fallen under the control of the elite. This is not only a hope but an increasingly popular opinion.
One more aspect is currencies like Steem, which generate value in a new way.
Lastly I like to think of Cryptos as diamonds and rubies. What makes them valuable but popular opinion and limited availability!!
@juanmolina be cautious surely. But to compare this to the dotcom bubble is overkill. Nobody is throwing money at blockchain by the bushel, in fact cryptos have flourished in stormy financial weather; and this indicates a sound support base.
Keep Steemin!!
Greetings dear friend @sarez.
Thanks for this amazing comment.
In my opinion, the growth of BTC is supported by the great confidence that it has managed to sow in the investors. Remember that in the beginning nobody believed in BTC. It has been a work of 10 years to establish itself and achieve to define itself as a real asset.
In general, the crypto looks like a safe investment. But falls in prices like the one that occurred last year, made more than one investor tremble.
Grettings, my dear @juanmolina.
The world of blockchain technology is just beginning to be glimpsed, most are looking at the economic aspect and the profits they could make. After the fear disappears about this technology, we may be able to see the real use of the blockchain. We all know that blockchain can be used in many areas for human benefit. This technology is able to offer transparency, immutability, trust, and security.
With the introduction of Facebook into the game, possibly people will accept more cryptocurrencies and then we can see whether or not it is a bubble.
Thanks for sharing
I totally respect your point of view.
You are my brother @ jadams2k18.
But I must tell you that we are truly in a bubble.
Facebook is just going to be part of it.
You are my brother too my friend 😊
Hi @juanmolina
Wow friend I can only say we must be mature in this context and not lose sight of these bubbles, I think that investors are also much better prepared have learned from the mistakes but as we say in Venezuela is never missing a pajuo that puts the cake .
That pajúo only must make a great movement of capital to put the whole market to tremble like a castle of cards.
Thanks for invite me to Your post
I have my own investments like ripple, litecoin bitcoin... Honestly I believe that it is not a bubble. If You will watched a historical trend line and other historical data You can see it's normal and the price of bitcoin will be rised. I Hope You will understand me. I can say that it's worth to make investments 😃
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I understand you, dear friend @ragnar94.
I think that investors have achieved a degree of maturity and knowledge that has kept the market fairly stable.
@juanmolina, In my opinion people should understand how much powerful both Cryptocurrency and Blockchain space is, and one can see that these space influenced Facebook too, to bring their own Token in 2020. Its time educate ourselves towards this new change and Centralised Movements telling that this space is something Revolutionary. Stay blessed.
Definitely education is the indispensable factor so that the new generations also adopt crypto. Undoubtedly before making any investment it is necessary to document the risks and have realistic expectations of the profits.
If all the investors acted according to solid knowledge instead of only impulses or only by fashion, we would have a stable growth that would prevent this bubble from exploding.
Yes, Reality check is important and practical knowledge is vital to build solid foundations. Enjoy your time ahead.
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I can say that virtual currencies are causing a social and economic impact. It is like an evolved system of money management, anyone can enter the world of blockchain but the point is how to get a profit and know how to win. Excellent article.
Thanks for reading and commenting.
I appreciate your opinion. I hope that my work has contributed with your knowledge.