Cryptocurrecny has all of the required traits to be classified as money. It’s difficult to forge, it’s portable and convenient, durable, scarce, divisible, and with majority adoption will be universal. There are more investors backing ICOs as well as a growing community of HODLers (Hold On for Dear Life) who are buying coins and building portfolios. However, the key drivers to cryptocurrency values are still uncertain and investing in the space has been compared to gambling.
Bitcoin’s exponential growth in value, which exceeded $19,000 USD in December 2017, raised speculation over whether or not cryptocurrency in general is an economic bubble. The key characteristic here is not volatility, a bubble occurs when an asset’s value crashes after it is valued at a price exceeding the intrinsic value. We cannot predict a bubble because it is speculative and based on uncertainty of the market and is subject to factors outside of supply and demand, so we must rely on past examples to make an assessment.
One of the most well known economic bubbles was the Dutch Tulip Mania (1634-1637), where Tulip bulbs were introduced to the Netherlands from the Ottoman Empire. The exotic flowers became a status symbol for high society, and combined with the scarcity of the bulbs, people began flipping the bulbs causing prices to surge until a buyer defaulted on a contract causing the market to implode and a small economic depression that lasted several years. Beanie Babies observed a similar pattern where people bought the plush toys in anticipation of flipping them in online auctions, however, when the company discontinued a select number of toys, their value did not rise on auction-sites, causing prices to crash, never recovering.
Not all bubbles followed this trajectory, the South Sea Company of Britain (1716-1720) crashed after executives spread rumours about the commercial value of the company’s trading rights, effectively deceiving shareholders into investing. The Mississippi Company (1736-1720) bubble burst when John Law’s national bank of France issued more bank notes than it received in deposits causing an inflation and subsequent crash that left the country in worse economic conditions than before.
Most recently, the Dot-Com crash in the late 1990s showed the hubris of investors who overvalued companies thought to transcend traditional economic principals due to their new technologies. While there were numerous accounting scandals during this time, they did not necessarily cause the dot-com bubble to burst. This was perhaps for the first time a real-time realization that the industry was a speculative bubble that caused many investors to sell.
Investing in cryptocurrency is fundamentally different than stocks and bonds due to the risk and regulations. Though some might look at trends and see a bubble that does not necessarily mean that history will repeat itself. While others might be convinced their investments are sound, new conditions for a bubble may be forming and are bound to go undetected. What we know for sure is that following many crashes the asset tends to find an equilibrium moving forward rather than disappearing entirely. Cryptocurrency has a clear need, many benefits, and may even replace cash, so we anticipate that people will continue to innovate and adopt blockchain technology.