Are we in a Cryptocurrency Bubble?
Introduction - Living Inside A Bubble
This post was inspired by a post I read on Medium by Zach Herbert and my response to it.
Herbert was basically arguing that we are in a cryptocurrency bubble and was suggesting one possible solution to it.
His suggestion is to create a new type of metric called inflation factor:
We recommend adding a new metric called inflation factor that indicates how the market cap could be affected over the next five years by token inflation.
Inflation factor = (new supply over 5 years) / (current total supply) * 100%.
I'm not sure if his solution will work but I do think we need to consider such options.
I would love to have a discussion on this - I'm not an expert on such matters but I think it is an important thing to think about.
The recent Gnosis ICO seems to be a perfect and in my opinion cynical example of a project deliberately using the current market situation to lead to gross overvaluation and demand based on absolutely nothing more than hype and restricting the sale to 4% of the supply.
In the real world markets of stocks and shares these kind of shenanigans would be taken into account and reflected in the price.
In the crypto world it does not seem to matter.
From what I am seeing the vast majority of tokens being pumped have no long term value proposition - there is no utility.
The growth seems to be purely based on hype - a hallmark of bubbles where people keep jumping in due to fear of missing out.
Please read the the post by Zach Herbert if you have time. I have also copied the reply I posted in the thread below - unfortunately I couldn't get the formatting the same though.
My Response in the Medium Thread
The thing about bubbles is that they always burst.
Right now we are in the midst of a huge cryptocurrency bubble fueled by a number of different factors (- low growth in traditional investment areas, generally low interest rates, unstable local currencies and the sheer novelty factor to name just a few).
The wild-west nature of the blockchain world also means that the people behind a lot of these projects are really milking these circumstances in a way which makes it all worse:
The gnosis ICO was basically designed to create a price bubble and gross overvaluation.
How you can expect anything else when something is so anticipated and launched during a period of historical (or should it be hysterical) growth in the crypto world whilst only selling 4% of tokens — is beyond me.
You are either monumentally stupid or you are deliberately creating a bubble.
Neither is good.
It is extreme market manipulation either way and due to the naive nature of most cryptocurrency investors it does not appear to be being factored into the price.
People just keep buying into it — but the thing is:
Sooner or later people will realise that the emperor is naked and the correction will occur.
I’m not sure if your solution will fix this problem but it is worth trying because the bubble will collapse at some point unless measures are taken to deal with it.
One of the big problems with these bubbles (and why such suggestions will meet resistance) is that people become so intoxicated with what they see as “easy money” that they fail to see the bigger picture:
An industry wide collapse would be disastrous for everyone’s bottom line and would set blockchain progress and adoption back by at least five years if not more.
If it seems too good to be true it almost certainly is and the market will inevitably correct.
Of course this kind of advice almost always falls on deaf ears — people always think “this time will be different”.
It never is though.
People generally don’t learn from history, they just keep on repeating it.
Thank You For Reading - Have your say in the comments:
No
You would say that though ;)
I've earned millions online since 1999, with everything from the beginning of PayPal to the end of paid porn. Cryptocurrency is just getting started. Bitcoin at $10,000 and Ethereum ts $1000 is inevitable, and will happen faster than most expect.
Gnosis is definitely not a good investment, and most smart crypto investors know that. Prediction markets is a very lame idea
We are not all good traders like you though. I can't say with 100% certainty and I wouldn't even pretend to I just feel the way people are behaving suggests it but the only way to know is to wait and see.
buy and hold is the best way to flow, I trade because I have time to trade and increase my holding
That is what I am trying to do too. It is very tempting and easy to get caught up in FOMO though.
the safest bet in crypto is steem and bitcoin, that's why more than 50% of my crypto will always be in steem, sometimes I think the only reason I am in other cryptos is to use the profits to buy steem
Bad traders will lose their money and learn not to trade while good traders will earn money. There are currently no safe places to store wealth in Ethereum. It's all one big gamble. When there is a place to hold an asset and get 8% interest annually then you'll see a lot less going into high risk ICOs but right now that doesn't exist as there is no stable currency in Ethereum and no passive income sources.
Yes.
i agree, this is all just getting started. money (fiat currency) is now flowing into the whole cryptocurrency market, the marketcap is growing with every second, as a result of low interest monetary policy and low-yielding investment opportunities, and lastly the war on cash around the world.
a lot of crypto currencies will go to zero, some will prevail and explode in value. the most interesting thing is actually that not all crypto tokens are actually meant to be currencies, but to be like shares of the blockchain companies/applications. safest bets are bitcoin and ether in my eyes, especially because most other cryptos are traded on exchanges and you need bitcoin to trade. demand will stay high, and interest in the blockchain market is high.
i guess there will be a bubble at some point, but we are not even close yet.
Lolz. Come here fishy fishy
99% of the people around me laugh when I speak about criptocurrencies. There is nobody inside this new asset class. How can we live in a bubble if 99% of the people I know do not even know what is this blockchain technology about? I think you are confusing high volatility with a bubble. Of course we will see eventually a bubble, but it will be a bubble when your taxi driver tells you how good is buying bitcoin! That will be the time to jump!
I think you are mistaken. You don't need a huge number of people to make a bubble.
If it's a bubble it's only because the markets are immature and also because there is no way out of it. If you had 5000 ETH where would you put it if you wanted to make it generate a profit? Cashing out means 40% income tax.
Yes for sure - but I suspect those that are more savvy investors probably have some means to get around the regulations - particularly in non Western countries.
In non-Western countries yes, but Ethereum is very popular in Western countries.
It's popular everywhere now. I think if there was some big crisis the base ether token itself will likely be safe.
Right, but here I see involved in this "bubble" a little percentage of the world population, and I think thats too low having in mind that this technology is going to change almost ALL world population lifes.
Yes long term it will. Long term is irrelevant in bubbles. Look at historical examples like the dotcom bubble. The internet didn't go away - it still conquered the world but when the bubble burst times did become very tough and it delayed progress.
The bubble seems to be caused by over regulation, high cash out taxes, and lack of proof of stake or low risk interest sources. In other words an immature over regulated over taxed market is in a bubble because it's immature, over regulated and over taxed.
If the taxes weren't so high there wouldn't be so much difficulty in cashing out and there wouldn't be a bubble. But when taxes are 40% (income taxes) then you're stuck in Ethereum if you have a lot of Ethereum wealth unless you hold for 2 years straight for the capital gains rate.
Holding doesn't increase your wealth or generate any income. In fact if you just hold you lose wealth guaranteed due to Ethereum inflation which encourages people to put it into ICOs in the first place. Only proof of stake combined with tax exemption will fix this problem in my opinion.
If you compare with Internet adoption I think we are currently in 1993-1994. I repeat: still far far away from the bubble peak of 2000.
We will see. The psychology is what makes the bubble I think.
I don't think any of us believe we are nearing the point of saturated adoption. However as @thecryptofiend is saying, a bubble can be formed by a very small group. Look how shook bitcoin was with the whole Mt. Gox incident or the DAPP disaster with Eth? These were just external crisis driving price down.
Imagine what happens when a bunch of these token projects collapse into the vaporware that they are? It's going to take a while to recover major losses and it's also going to slow crypto and blockchain adoption.
But those events you are talking about are not bubble events my friend! That is just volatility. Normal and beautiful volatility that this kind of brand new assets provides. Those events were high volatility ones and provided wonderful buying opportunities. Of course we will see more 40%-60% drawdown, but they are only that: drawdowns that provide huge buying opportunities. The bubble burst will come but it is far far away...
I would define them as bubbles. I think you have a mistaken view of what a bubble is. This Wikipedia definition is talking about stocks but the principles are the same for anything:
In this case I would say for many of these tokens the financial price is way out of kilter with their utility value or indeed the amount of completed product behind them. They are often little more than a fancy website and an idea.
I think the hallmarks for me are overvaluation of a particular asset which becomes exaggerated as a result of human psychology and group behaviour.
It is not the same as volatility although volatility may be involved.
I have been prone to it myself and it is an intoxicating mix which tends to blind people to rational thought.
Interesting. And how about STEEM? Is STEEM in a bubble too? Would you recomend selling some STEEM and buy them after the "bubble" burst?
You completely miss my point - Steem is one of the few cryptocurrencies that has utility so is probably one of the safer ones - it is definitely not currently in a bubble. Last July is a different matter though.
I agree with you. There are few safe cryptos out there, and one of them is STEEM.
Not Steem, but the Steem Dollar. Steem itself isn't safe. Steem Power was once interesting due to the interest but right now it's too low. Only the Steem Dollar is a stable store of value.
I get what you mean here. For example if you had a token that represented the total index of the market, you probably are fine continuing to buy in and use things like dollar cost averaging. But the token market is its own animal and I think we can say there is a bubble going on there.
The vast majority of tokens are trash over there and will end 0: YES.
There will be huge volatility events with 50% more drawdowns: YES.
Using mean reversion algorithms prices are quite overvalued right now: YES.
There is a bubble and prices will be dropping for at least 4 months or more: NO.
Either it's a bubble or the world is finally waking up to crypto. I'm not sure which one is true.
A combination of both. But I think the bubble is caused by over regulation, combined with immature markets.
If you were an early Ethereum holder who bought in during the crowdsale, and now you have 5000 ETH, what would you do with it? Suppose you bought in 12 months ago, what would you do with it then? In the first case you can possibly cash out the 5000 ETH and get capital gains tax rates but in the second cash you could be paying income tax rates of 40%. So just the tax situation DISCOURAGES people from spending their ETH any more than is necessary for survival. This basically locks it up with no way out for large holders. Thank the IRS.
And this locking up of wealth inside the system will make the ICO really the only thing you can do with ETH at this time. You cannot live off ETH, if you cash out you get a penalty, if you just sit and hold ETH you risk the price going down and not having the wealth because it's volatile and because it's inflating.
Solutions could be having assets which pay dividends like Peerplays. When you have more variety of assets then maybe people wont rush to crowdsales. Also a stable token such as the Ethereum dollar will allow people with ETH wealth to store their wealth safely which will reduce the desire to keep putting it into ICOs. But when it's all volatile then the ICO is not necessarily going to look as risky as it would look if you could get 8% or 10% interest just from the Steem Dollar for instance.
Three solutions we should push for as it's in everyone's interest:
In the absence of stability, productive assets, and with excessive penalties for spending, is it really a shock that people don't really want to do anything but put it into ICOs? Especially people who got it by mining or by the Ethereum ICO? If you got a million dollars from an ICO you might be tempted to put some portion of that into another ICO.
It could be both - I hope I am wrong though. The thing is a bubble will delay things but it will not kill the idea of crypto/blockchain. The current fiat money and banking system is broken and that is not going to change.
Yes, I agree. Could be both.
If inflation shall be build into Crypto, I don't know. Fact is that crypto is on its own island. Fact is this island doesn't have solid connections/bridges with the 'normal' world. For me it is clear, strong, solid and wide bridges shall be build with the 'normal' world to allow for crypto to grow exponentially and to give it a real value. To give crypto real value and stability, it shall be integrated with the 'normal' world commercial businesses.
Earlier today I wrote a post about this topic https://steemit.com/steemit/@edje/question-who-owns-the-steem-blockchain-and-steemit-service-and-api-s-the-steemit-steem-business-opportunity
This is exactly the problem and you highlight it. Crypto is an island with no easy way in or out. If we want to change this, push for a reduction of taxes or exemption of taxes and then watch how fast people cash out into fiat. As it is right now though, there is no certainty in crypto and no easy way out of it even if it is a bubble.
Even if you have Bitcoin, if you spend it what are the tax implications for buying a pizza?
In NL at the moment no tax implications when using BTC or other altcoin.
Consider yourselves very fortunate that you aren't a US citizen then. Our tax structure is one of the most complicated and regressive in my opinion.
Ours in NL is also not that simple, but any complex tax system gives opportunities to establish a new business. I always look it from that point, the opportunities :)
This would be fine but the US IRS hasn't been very clear on what they want.
When US IRS is clear about it, would this not give the opportunity to automate this in the financial processing? An opportunity for an online accounting software for crypto currencies?
That is what we all want to happen and why it's so horrible that they aren't clear!
Cryptos need to start including commercial business using their coin. Specific type of businesses shall be targeted (through direct sales; not through mass market marketing) and the required technology and everything they require for them to onboard, shall be arranged. That is a way out IMHO.
The issue again is regulation. Even if commercial businesses accept or use the coin the regulations involved make it hard for holders of the coin to spend it particularly when the price has gone up. So the higher the price goes up, the less people want to spend because of taxes, and the corporations don't want to hold coins due to legal or regulatory risks, so how do you fix it so this changes?
Not all countries regulated virtual currencies yet, so run the operation from countries without regulations. Like in NL, no regulations around BTC and altcoins. In Germany some regulations around BTC, but not to difficult. I can even imagine the part that will work with the brands to be onboarded will be support in technical integration, process integration and may even get a service to handle the regulators and taxes for them wrt the altcoins. I truly believe propositions can be made that will attract the first innovative brands to eg Steemit. So far, none of the altcoins is creating these propositions. I would love to create and execute them, and now I'm in the process of finding out who is responsible for what and with whom I shall deal to bring eg Steemit to the next level through propositions and activities to bring brands (from small to large) to Steemit.
Spending coins could be spending it on promotion channels in Steemit. Spending could be re-distribution to the audience/followers through win games. Today Steemit is blogging service, so a marketing channel, hence 100% cost in terms of financials. On Steemit a brand can earn coins post/comments, and can burn them by promotion and/or give aways. Coins can also be used to pay a fee to be allowed to use Steemit as a channel, or at least to pay for the specific technology, features, interfaces, integration that will be different from segment to segment.
I don't think that is correct. There have to be bridges otherwise money can't flow in to it. The money come from the real world via albeit via bitcoin. These kind of arguments miss the point of what I'm saying.
Sure there are some bridges available but these are conplex and more or less only used by the 'gamblers' in the investment world. These brdiges are not providing any stability to the Crypto-world. Look at what is happening last month with the crypto values. Only jumping, 10 to 100% in short time. The bridges I talk about will give crypto stability! This to be achieved by onboarding and integrating commercial businesses from the normal world. They will demand stability, and Crypto-world will have to start creating solutions to give that stability. That bridge will be sooo much more solid then the small and complex bridges we have today into Crypto-world.
I agree but none of that has anything to do with bubbles though.
I think we are talking about different things - such bridges will ensure long term stability in crypto but they aren't going to do anything about people investing recklessly in vapourware projects.
I know because I have been one of those people in the past.
I'm not sure; Crypto-world is a complex world with little solid information and due dilligence. When Crypto-world become bigger, much bigger, more independent investiagtors and researchers will provide better guidenance in what is risky and what not. Same as in the normal world's financial sector. Crypto-world is simply to small to be relevant for such independent parties to spend time and resources to try and create risk analyses on any existing coin as well as new coins and initiatives.
Again I think you are misunderstanding me - please do some reading on historical market bubbles.
Market bubbles are everywhere. Crypto could be one of them. When not adding value such as in real services around the coins, they will at some point burst. Those who manage to create real services arround it will have a chance to survive. If those coins are currently overvalued, that is the question. I agree that when no real services are added, Crypto-land is in a bubble, since most coins do not havr any value ie services that make use of the coin.
Yes I agree and that is the point I am making - I think we were misunderstanding each other before.
Those projects that have a sound basis will likely survive but it may lead to tough times and some may not make it.
Even some good web companies were destroyed during the post dotcom bubble era because of the overall contraction in the market that was a direct reaction to it.
It has everything to do with this bubble. If there is no stability of the underlying token, and no places to get low risk interest, and no easy way to spend the token in the outside world, well what else is left?
If you have ETH one of the few things you can do for it to earn more is ICOs. You don't have the ability to buy real estate in the real world with it, or buy real shares in real companies with it. You can't really do much anything except what people are doing with the ICOs.
Cryptos are not investing time and money to get their currencies into the real world.
You don't get taxed when you flow fiat into crypto. The taxes come when crypto tries to convert back to fiat. You can buy Bitcoins from Coinbase no problem, but if you then sell Bitcoin for pizza but your Bitcoin went up in price, don't you now have to pay some sort of capital gain?
The complications involved with just spending cryptocurrencies is enough to discourage it.
In NL we do not have capital gain taxes for instance. I don't know the rules in each country, but I'm sure the rules are clear for each country. As per other comments I made to this post, when creating propositions for commercial businesses, tax advise or even service shall be part of the proposition.
Commercial business will need to be onboarded not through general marketing activities, by through person-2-person sales activities. That is why bringing the business segments onboard will cost good money due to the nature of the sales method. Obviously, a solid proposition needs to be created first :)
I do think we need to factor in inflation in our future price, but I also feel there is a good chance it is the opposite of a bubble. Cryptocurrency is very niche at the moment (try talking to anyone outside of the crypto world and see the looks you get) and the market caps are crazy, can you imagine if it goes mainstream? Yeah we can't have so many coins of value but the ones that make it can see great success.
I understand what you are saying but I would disagree and agree lol. I think the current psychology is inherently bubble like.
Sure it may not be and we will have to see.
I would also say that a bubble won't kill cryptocurrency and some of the current players will likely survive - someone gave the example of Amazon.
It is possible but I see, if it happens, maybe a medium dip with bitcoin and a lot of coins with low value drop by the waste-side. So we kind of agree. But
I don't see a crash. I see what you're saying and I don't disagree either, but I feel this tech really is revolutionary and all it needs is the numbers. To me a bubble needs to be built on a false premise with a rush of money. There is a rush of money, maybe a little too fast, but the idea behind it is solid. Blockchain is the future. And I still think there is a chance this is just the beginning, the bubble might be years off if at all. This is a currency that is, literally, worldwide with low to little fees, it has a lot of a value (but I'm not an expert, so please, if any one reads this, don't invest solely on my advice, do your research and only invest what you can lose.)
Yes of course.
Time will tell and if there is a bubble or other trouble it is wise we keep our eyes open. Thanks for discussion :)
Sure and like I said I hope I'm wrong (I am quite often) but just best to be cautious.
Thank you discussion and good discussion at that is one of the best things about Steemit:)
When it's frontpage CNN Money, that's when you realize it's a bubble, but even then it may last a few more weeks. Knowing the cryptoeconomy 5 years, a common mistake is selling too early in bubbles, but we'll see soon enough. :)
Knowing my luck I would sell too early lol!
Congratulations @thecryptofiend!
Your post was mentioned in my hit parade in the following categories:
Thank you!
I think we are about to see a massive transfer into the Crypto Currency market across the board. Bitcoin will keep gaining, but the get rich quick crowd will hit the penny and below cryptos. And when ever we see a BTC retracement we'll see more money moving into ETH and LTE and I think Ripple is going to take off also no matter how much the Crypto community hates it. Even Dogecoin is others like it are going to start increasing in price. Two years from now I doubt you'll be able to find anything trading today (in the top 100 Marketcap, that's not a total scam) for under $1 and BTC will be around $5000.
I could be wrong but let's how it plays out. It's too soon for the bubble to burst. Give it 5-7 years.
I just wish I had not missed the move from Sub .01 prices on Ripple to now it's at .09 we were talking about it right before it happen. I got in at .05 and .06
I think everyone knew Ripple would take off at some point was just a question of when but like you said it is not popular in the community.
Putting a correct economic value on any item is not a straightforward task. There are different methods, different purposes, different uses.
I agree that the current default market cap metric that is often used is flawed and the introduction of another metric to give an insight into the coins future is welcome but whatever metric is introduced will be subjective to say the least and probably not comparable across coins. What value would you use for USDT for example? Future Coin supply would be a subjective assessment of future investments in the coin.
I don't think there is a perfect method - we have a flawed system and hopefully less flawed solutions but it is something that will require review.
I'm thinking we are in a bubble! And maybe we are at the point like the internet bubble, where the few gems recovered and continue to be high flyers. I think amazon as a perfect example. I think steem will be in the $$$, but it won't happen until all the desperate give up on it.
Good points and I think some companies and projects can survive bubbles for sure. Steemit is one of the few platforms that has actual utility. There will likely be tough times for us all though, if it is a bubble and it ends up bursting.
I'm wondering if anyone remembers the bubble that happened from october 2013 to march 2014. It was in the Mt. Gox market and over the course of 5 months the price of bitcoin rose from 100 - 1300 USD. Do we see that kind of bubble here? Considering it was early on in the cryptocurrency game there are many more tokens now. But, we still have to pay heed to what happened before. http://imgur.com/a/mJPab Looks like a bubble. A 1200% rise in the price of an asset, that holds for a period of time...(the price of btcmtgox didn't fall until after feburary 2014).
Now I know the counter arguments to this, saying that there were currency manipulators playing in the mtgox market, and that the Chinese played a large part in this huge price jump in trying to move dirty money out of China. BUT! It is a market! People will do what they will in a market, and utilize the resources that they have at their disposal, just because you see examples like gnosis, you can't rule that the whole gammit of cryptocurrencies is experiencing a bubble. I'm bullish.
Skrt
Far far from the point of the Internet bubble. When we start seeing billions tossed around in smart contracts which are all hype then we are in something like the Internet bubble. We are seeing 10 million here, 12 million there. And we will continue seeing this because there is massive wealth from Ethereum crowdsale token holders and miners and no where to put it.
Is there a stable Ethereum Dollar yet? No. Is there any token in Ethereum which is considered safe and which pays out a dividend? No? Then the only thing a holder can do when the price goes up is put it into an ICO and try to get even more to beat inflation of Ethers. Only a mature market will provide enough options so that this changes.
And getting in and out of fiat also is not free. When you want to cash out, and if you do so without waiting for 2 years, you get to pay 40% in income taxes. So a lot of ICO token holders and Ethereum crowdsale holders can literally do nothing better than to sit on their stashes for 2 years.
Result? The wealth is trapped with no where safe to go except into ICOs. Call it a bubble but there is no way to pop it and it's far from the stage where it can be. Maybe proof of stake will settle it all down though as holding ETH will give a premium while today it gives a penalty. Cashing out into fiat still give give a penalty though so maybe people complaining about this bubble should be pushing to change the laws so cryptocurrency is tax exempt. I expect if you did that then you'd see billions of dollars cashed out and no more ICO bubbles.