The cryptocurrency market had a spectacular 2017: currencies such as bitcoin, Ripple, and ether effectively became household names as they saw their values multiply immensely. The market is showing no signs of slowing down in 2018 either, with Russia recently introducing the crypto-rouble, and the price of Ether moving above $1,300.
Despite these successes, the likes of Warren Buffet and Joseph Stiglitz assert that cryptocurrencies are a bubble, and are thus tremendously overvalued. In order to evaluate these assertions, it is useful to compare the cryptocurrency market with the dot-com bubble of the early 2000s.
The Dot-Com Bubble
The late 1990s saw a period of incredible growth in the usage of the internet, for both consumers and businesses. As a result, investors were willing and eager to invest at any price, in any company which harnessed the power of the internet or had a “.com” suffix in its name, causing the NASDAQ index to rise from 1000 in 1995, to 5000 in 2000. At the height of the bubble, it became possible for any promising company, with a “.com” suffix to become a public company and raise large amounts of capital via an IPO, despite the fact it may never have turned a profit, or even recorded any tangible revenue.
The bubble burst when some of the biggest tech companies, such as Dell and CISCO placed huge sell orders on their stocks at the market’s peak, resulting in investors panic selling huge quantities of stocks. Without large quantities of investment capital to sustain them, an enormous number of dot-coms went out of business, taking trillions of dollars of investment with them.
The tech market has taken 17 years to recover from this crash. The stock price of Microsoft was at $59 per share at its peak in 2000, and only exceeded this value in October 2016. CISCO’s peak share price was $79 per share in 2000, fell to $11 in 2002, and is currently around $41. Similarly, a share in Intel cost $74 in 2000, and is currently priced at $43. On a more positive note, companies such as Amazon and Adobe have managed to exceed their share prices beyond their peak dot-com bubble values.
The Cryptocurrency Bubble
New technologies are prone to overvaluation because it’s difficult to determine their fundamental value using traditional methods as they generally don’t start generating revenues until far into the future. This is especially true of cryptocurrencies that may never generate any cash flows.
Without tangible revenues to illustrate fundamental values, markets succumb to the excitement and ‘fear of missing out’ as investors eagerly speculate on all of the new applications of new technologies, without considering the time-scales or feasibility of these applications.
This kind of speculation leads to overvaluation, and presents the first similarities between cryptocurrencies and the dot-com bubble: cryptocurrencies can attract investment in the same way that most seemingly promising companies with a “.com” suffix could attract venture capital.
This is best illustrated by the recent example of Kodak, who recently launched a new cryptocurrency, ‘KODAKCoin’, as part of an image rights management platform. Kodak has so far released no details on how the system will work, but still saw its share price double in the 24 hours following the announcement. Even more incredibly, Long Island Iced Tea Corp. (an American brand which manufactures Iced Tea and Lemonade) saw its share price rise 289% after rebranding itself as Long Blockchain Corp.
On the other hand, it can be argued that cryptocurrencies are only at the beginning of a bubble, or not in a bubble at all. During its peak, the market capitalisation of the dot-com bubble was $3-5trn (not adjusted for inflation). As it stands, the market capitalisation of all cryptocurrencies is $750bn, suggesting that this is only at the beginning of a bubble.
Another important point is that some companies (such as Pets.com) went bust in the dot-com crash because they were losing money and lacked innovation, whilst some cryptocurrencies are building the next iteration of the internet. Firstly, bitcoin is now genuinely seen as an alternative to money, with over 100,000 merchants worldwide (including Microsoft) accepting it as payment.
Additionally, by introducing smart contracts, Ethereum has become a new platform for projects in the blockchain environment and has disrupted traditional investing by enabling individuals to invest in any token startup and own the core asset they are investing in.
In 1996, John Rothschild wrote, “Joe Kennedy, a famous rich guy in his day, exited the stock market in a timely fashion after a shoeshine boy gave him some stock tips. He figured that when the shoeshine boys have tips, the market is too popular for its own good.” Similarly, social media is saturated with posts about cryptocurrencies from investors of all ages, with even Paris Hilton backing an ICO. This coupled with the fact that any company with a cryptocurrency or with “blockchain” in its name seems to see its share price skyrocket strongly suggests cryptocurrencies are at the beginning of a bubble, much like the early days of the Dotcom era.
Finally, in the same way that Amazon and Adobe survived, and then thrived after the dot-com crash, it’s likely that few innovative cryptocurrencies such as bitcoin and ether will survive the bubble bursting, and will remain household names in the decades to come.
Even if the market capitalisation of cryptocurrencies increases into the trillions before bursting, there may be a silver lining: in the same way that the dot-com bubble gave us the ‘backbone’ of the internet we have today, the cryptocurrency bubble may give us the next iteration of the internet, web 3.0.
Two New Blockchain ETFs, So What?
With the recent failure to get cryptocurrency Exchange-Traded Funds (ETFs) up and trading, the Nasdaq has listed ETFs this week by two companies that have shifted their focus to building portfolios of publicly listed companies with their hands in blockchain technology.
On its face, this might seem like exciting news for blockchain and crypto enthusiasts looking to get some investment exposure in the technology. However, anyone reading the headlines should temper their expectations upon a deeper look.
What are They?
BLOK is an actively managed portfolio run by the company Amplify ETFs. Under Amplify’s original registration statement prospectus with the Securities and Exchange Commision (SEC), the ETF was originally going to be called Amplify Blockchain Leaders ETF.
However, with good reason, the SEC was cautious to allow the fund to be listed with blockchain in its name over fear of having its stock price increase exponentially. Thus, Amplify settled on the name “Amplify Transformational Data Sharing ETF.” Since BLOK is actively managed, as opposed to its counterpart BLCN, the fund claims that this style of management will allow the fund to actively respond in real-time to blockchain related events and news such as IPOs, acquisitions, partnerships and strategic announcements, which could have an impact on the valuations of companies in the blockchain space. Amplify defines BLOK as a portfolio of “publicly-traded global equities actively involved in blockchain technology via investment, research or revenue creation.”
So, what are you buying if you decide to invest in the BLOK ETF? Well, many brand name tech companies that aren’t necessarily directly impacted all that much by blockchain technology. BLOK’s top holdings consist of giant tech companies such as IBM, Microsoft, Intel and NVIDIA, the e-commerce site Overstock.com, a payment processor Square, and the banking conglomerates Citigroup and Goldman Sachs.
Of those listed, only a few actually have heavy investments in blockchain. The two leaders being IBM, which has a department of 1,500 employees dedicated to blockchain technology, and Overstock.com, which is quickly transitioning from an e-commerce to a blockchain Bitcoin company. That is not to say that these companies can’t indirectly benefit from the developments of blockchain and the growing popularity of cryptocurrencies.
For example, NVIDIA’s stock price has increased by over 400% in the last 2 years because of the strong demand for its graphics processor units (GPUs). NVIDIA’s GPUs are among the most popular computer chips used by cryptocurrency miners who are looking to get rich and act as nodes for blockchain networks such as bitcoin. In fact, all of the holdings of BLOK do in some capacity have exposure to blockchain – although some are slight. However, any investor wanting to gain real exposure to the technology should look elsewhere, because the ETF resembles something more of a tech ETF, with some random payment processors and banks thrown in the mix, than an actual blockchain ETF.
Unfortunately, BLCN hasn’t distinguished itself from BLOK and a real blockchain ETF. BLCN is a passively managed ETF from the company Reality Shares ETF. Reality ran into similar trouble with the word blockchain being in its original name, Reality Shares NASDAQ Economy ETF, in its registration statement prospectus with the SEC. Reality settled on the name “Reality Shares Nasdaq NextGen Economy ETF.” Unlike its counterpart BLOK, BLCN is a passive index tracked ETF that will track an index, similar to the S&P 500, on the NASDAQ and will not be actively managed. The holdings in the index are very similar to the current holdings of BLOK, and features names such as IBM, Overstock.com, Intel, Microsoft, and NVIDIA. This leaves investors without real hard blockchain exposure.
Even though the two new ETFs aren’t exactly what blockchain enthusiasts were hoping for in terms of gaining easy access and a more diversified exposure to companies that are specifically focused on blockchain tech, it is a good start for those looking to perhaps dip their toes in the water of the blockchain world. However, it still remains that, outside of investing in the Bitcoin Investment Trust from Grayscale traded under the ticker GBTC, purchasing bitcoin and other cryptocurrencies outright on Coinbase or a purely crypto exchange like Bittrex or Binance is the only way to get a true exposure to blockchain and the crypto economic world.
Cryptos Rally Slightly
Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.
Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.
Read more on Cryptocurrencies:
Crypto Carnage: Blood on the Dance Floor
It is said that ‘Blue Monday’, typically the third Monday of January, is the most depressing day of the year. This has, undoubtedly, been the case for cryptocurrency owners worldwide; from Monday onwards, almost all of the world’s major cryptocurrencies have seen a drastic slump in their prices.
Having reached the $14,000 mark last week, Monday onwards marked a severe fall in Bitcoin’s value. On Wednesday, the dubbed ‘king of cryptocurrencies’ dropped to below $10,000 for the first time since the end of November, before making a small recovery on Thursday. It stands at $11,500 at the time of writing, but the day is still young.
And Bitcoin has only been leading the way. At this point last week, the price of Ethereum, the second most valuable cryptocurrency, was approximately $1,200; a slump on Monday saw it fall to a low of $800 on Wednesday before pushing through the $1,000 threshold again, and reaching $1,030 a day later.
Ripple’s XRP also followed suit; the cryptocurrency has almost halved in value over the past week – from around the $2 mark to a low of $1.20 on Tuesday. Since then, it has marginally recovered in price, to $1.48 at the time of writing.
Monero, IOTA and Cardano were also impacted – since Monday, they have declined in price by 35%, 22% and 21%, respectively. Litecoin now sits at $195, down from $240 at the beginning of the week.
The crash occurred at a time of optimism and hope for cryptocurrency owners. Just earlier this week, US money transfer company MoneyGram announced a partnership with Ripple in the aim of streamlining money transfers. Yesterday also marked the expiration of the first Bitcoin futures contract that had been listed by the CBOE.
Still, China’s offensive rhetoric against Bitcoin and other cryptocurrencies in the last seven days is likely to have stoked fears amongst investors, causing a major sell-off. The country confirmed earlier this week that it was seeking to further clamp down on its restrictions against virtual currencies by eliminating cryptocurrency trading.
It has also recently announced plans to further restrict Bitcoin mining within the country. Recent statements coming from Chinese governmental circles could go as far as to suggest that China wants to eliminate cryptocurrencies outright: the People’s Bank of China (PBoC) vice governor, Pan Gongsheng, purportedly encouraged the state to introduce a total ban on cryptocurrencies.
China is by no means the only country to have espoused hostility toward cryptocurrencies. Russia also partially echoed China’s scepticism – President Vladimir Putin noted this week that “in broad terms, legislative regulation will be definitely required in future”.
South Korea’s unreceptive stance toward digital coins – it was reported earlier this week that its finance minister, Kim Dong-yeon, had stated that the government would be introducing measures to clamp down on the “irrational” cryptocurrency investment rage – may have also played a part in driving prices down.
Still, for every bear, there seems to be a bull. Time shall tell whether increasing restrictions on cryptocurrencies from different governments will further impinge on their price, or if they will find a way to adapt to the new obstacles and prove all those championing them (and making millions in the process) right.
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