If you've been around the crypto world for more than a week, you've probably stumbled upon those words: "bubble", "crypto bubble", "we're in a bubble", bubble, bubble, bubble. Economic bubbles have happened in the past, leading to great and memorable crashes when those bubbles burst.
One of them in particular could be compared to the crypto craze that has been going on: the 1997-2001 Dot-com bubble, when everyone was buying any kind of stock that had the word "Internet" in their companies project. When the bubble burst, 50% of those companies disappeared, and even the modern giants such as Google, Apple, Amazon took years to recover and eventually surpass their all-time highs. In this article I will discuss the similarities and differences between the crypto enthusiasm of today and the Dot-com bubble, and why I believe cryptos are nowhere near that stage of speculation yet.
Define "bubble"
Bubble has become an extremely common word, and its meaning has been used quite loosely, so here's a quick definition that we'll be using:
A bubble
"A situation in which asset prices appear to be based on implausible or inconsistent views about the future."
What I really want to separate from bubbles is the bull-market/correction cycle that cryptos have know in the past few years. These are not bubbles as per the definition I quoted, since in the end the "asset price" was way, way lower than what it would be in the future; those are just normal fluctuations of an asset that had (and still has) such a small market cap. Bubbles are something much more serious and unhealthy than that; for cryptos it would mean that even if blockchain technology would change the world in the future just like the Internet did, cryptos are overpriced, just like Amazon& others were back in the day.
The similarities between the Dot-com bubble and now
1. Both the Internet and the Blockchain are revolutionary technologies
"Dot-com" stocks were companies based on a revolutionary technology: the Internet, while cryptos are based on a different revolutionary technology, the blockchain. Notice how despite the fact that the Internet has an extremely important role in our lives now, that didn't prevent the market from crashing. It is very probable that blockchain technology will change our lives just like the Internet has. That doesn't mean the crypto market can never be in a bubble, and probably one day it will reach that point.
2. Lots of speculation
Even right now, let's admit it: people are just throwing money at Bitcoin, Ethereum, shitcoin, whatever, just because there's a lot of hype behind cryptos. They don't care about the technology, the possible difficulties, all they see is a get-rich scheme. This is a perfect recipe for a bubble, and is similar to what happened in the 2000: speculators didn't do their research, and invested massive amounts of money into companies that were neither generating profits nor going to generate profits in the future.
Why we are nowhere near the dot-com bubble
1. Cryptocurrencies are a completely different type of asset
Crypto currencies are digital currencies. Their value solely depends on the value of their eco-system. Some of those systems depend on the companies charged with development of the cryptocurrency, but many coins are already functional by themselves. The only "intrinsic value" of stocks are the profits or future profits of a company, while Bitcoin's intrinsic value is in its code. It provides something new and useful: fast, cheap, decentralised monetary transactions. Investing in Bitcoin is betting on the fact that more people will want to use that kind of technology in the future; not in the fact that the company you're investing in is going to make some money.
2. The total market cap of the Dot-Com stocks was a $6.71 TRILLION before it crashed
Yes, your read that right. Even now when we are at an all time high in the cryptocurrency market, we are far, far away from 6.71 trillion usd. But wait, there's more! that was 17 years ago! which means those $6.71 Trillions were actually worth $9.52 trillion if you take into account inflation. What is $130B compared to that? Around 1.3% of 9.5 trillion. In other words, nothing. Honestly you can ignore the rest of the article and just focus on that single piece of information. Not only is the theoretical market cap for cryptocurrencies higher than that of stocks (since currency is much bigger than stocks), but even ignoring this fact, right now we are more than 75 times smaller than the dot-coms all time high, and 30 times smaller than the dot-coms total market cap after the crash.
In conclusion
The microscopic scale of the crypto market cap is just too small to be considered to be in a bubble. That doesn't mean every cryptocurrency is here to stay. It means that cryptocurrencies as a whole are here to stay, and the combined value of those that will prevail should be worth trillions of dollars before we even start about thinking of a bubble.
Sources:
Economic bubble definition: https://en.wikipedia.org/wiki/Economic_bubble
Time article about the Dot-com bubble: http://time.com/3741681/2000-dotcom-stock-bust/
2000 to 2017 usd inflation: http://www.in2013dollars.com/2000-dollars-in-2017