1. Background
Many of the mainstream financial papers, media and even celebrities will routinely talk about the market for crypto-currencies such as Bitcoin and Ethereum, and even newer entrants like tezos and eos as being in a "bubble". While that is a gripping catch-phrase to use, it is important to consider whether or not that is an accurate description.
So what is a bubble? Wikipedia defines a "bubble" as follows: "an economic bubble or asset bubble....is trade in an asset at a price or price range that strongly exceeds the asset's intrinsic value." Does crypto-currency fit that bill?
The answer to that question necessarily requires an analysis of the intrinsic value of Bitcoin and other crypto-currency.
2. The intrinsic value of Bitcoin and Crypto-currency
This has been a subject that has sparked a lot of debate. For one of the more memorable debates on the issue, you could watch this youtube exchange between Peter Schiff and Eric Voorhes:
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In brief, crypto-currencies' value is in creating a system that allows immutable, instant, and relatively effortless exchanges of value without geographic boundaries and government controls. It essentially liberates an individual's ability to store, protect and transact their own wealth.
I, like others on here, can probably recall the shock of telling someone that you have put amounts of "real fiat" into crypto. My wife's wide eyes and puzzled look when I told her, made me feel what I imagine jack (from jack and the beanstalk) must have felt when he told his mother that he had bought "magic beans" with their money.
My explanation to my wife was quite simply asking her to imagine two different options to use as currency and stores of wealth and to decide which one she thought was the better bet:
1.Fiat government issued currency: a system where there are no defined rules for the future: governments can print additional money at will, can take on additional debt at will, can go bankrupt, can make wonky geopolitical decisions that impact on the value, put the money into bailing out corporations in trouble or irresponsible nations, can create new laws to separate you from your wealth or restrict your access to it, or its mobility and use generally. The currency must either be entrusted to banks or financial institutions which can fail or can be stored in vaults of some kind although that can impede the ease of use.
2.Crypto-currency: a defined system of rules govern it and govern the amount of currency issued so it cannot simply be unexpectedly devalued, it has no debt and no risk of bankruptcy for the currency, there are no restrictions on use or transfer or mobility, the counter-party risk is done away with or at least significantly reduced because the fund transfer is immutable. You can store it yourself with ease and without compromising the ease of use in any significant way.
Of course, you could also compare it to other alternatives such as gold or jewels. First off, both gold and jewels are "mined" and there is no defined supply limit, it depends on how many mines are found and both are being mined aggressively. The more supply that there is, the less scarce it is and that likely decreases its value.
Further, another reason why gold and jewellery have "intrinsic value" is primarily because people say it has value, and because of its scarcity. However, as Eric Voorhes has noted, purple cactuses are also rare but they are not valuable (or maybe they are, I don't know a lot about the market for them). Gold and jewellery were probably initially selected as stores of value because they are, quite simply, "pretty and shiny" so people wanted them. While I accept that gold and jewels are prettier and shinier than Bitcoin, if one really uses that as the measure of their intrinsic value, then you have to consider that machines can now create an unlimited supply of gold and diamonds that are impossible for even appraisers to distinguish from mined versions (let alone the naked eye of your average person), which means that the intrinsic value as a commodity that people want because of their "look" is no longer rare.
You could also list real estate as a store of wealth (though not as currency). However, again, that is usually bound up by the same problems as fiat currency and, also, there are issues about the long term sustainability of the price in general. There are now digital printers that can create houses in very short periods, with very little human assistance...as this technology grows and the money and time to create houses reduces, what do you think happens to the price of houses generally?
Obviously, this does not consider all of the potential alternatives, but it does give a flavour for some of the most popular.
3.Does Bitcoin's low barrier to entry rob it of its intrinsic value?
Bitcoin uses open source code, which means that anyone can copy the code and start their own coin tomorrow. In fact, many of the alternative coins out there are "forks" (copies of the code with some changes) of pre-existing coins.
Many people question whether Bitcoin has any intrinsic value because of this: if the intrinsic value is the payment system itself and the Code that powers it can be copied at will, then why is it still valuable? The answer is, in my opinion, the "network effect" (the gain in value by more people using it) that is created. As more people use Bitcoin, more people accept it as a store of value, more people accept its reputation as a store of wealth and a vehicle to transfer it, which facilitates easier transfers in and out of traditional fiat and for goods and services. Computer applications to accept it and transact it enter into the mainstream on a greater basis as well. This creates a snowball effect with ongoing increase. As more people use it as a means of payment and as a store of value, it becomes more scarce given its defined supply limit (unlike gold) and the price of the coin increases.
Bitcoin currently has the backing of over 40 billion dollars of wealth having been invested and cryptocurrency has close to 100 billion. The available global financial market is in the trillions and so there is considerable room for growth.
That network effect is a big point of distinction when comparing Bitcoin against other altcoins (alternative coins). Many people argue that the traction gained by the other altcoins such as ethereum (and the reason for the excitement in the ethereum community about a potential "flippening" of the first place coin) has been because Bitcoin has fallen behind on its fee model, transaction speed, privacy and ability to facilitate smart contracts. The "flippening" would give ethereum considerable notoriety and public attention as the most used coin.
The ongoing innovation of the other coins, or delayed adoption by Bitcoin of things such as rootstock, increased processing speed etc, is chipping away at Bitcoin's network effect and thus its intrinsic value relative to the alternative coins and this is permitting alternative coins to get a foot in the door. Bitcoin continues to increase in price because the entire crypto market has increased in price, but its share of the market continues to decrease.
As the network effect of alternative coins builds and their time in the market increases, Bitcoin "first mover" (first coin to market and the best known) advantage continues to reduce.
Bitcoin has also been hampered by infighting amongst the various parties who all have different interests and have threatened, and continue to threaten forks of the coin, which would also likely impact on the network effect.
Even the threats themselves have taken Bitcoin maximalists like vinnay lingham completely out of the currency (imagine the effect on the confused public and the effect on bitcoin's reputation as a stable, predictable and accepted medium for the store and transfer of wealth if bitcoin unlimited activates and splits into two or more coins). As any stock market veteran will tell you, confusion and uncertainty about a potential problem is often a greater theft of value than the problem itself. It is difficult to see a future without those ongoing conflicts and uncertainty of direction for Bitcoin.
For a currency that prides itself on being decentralized, there must be some concern in parts of the Bitcoin community about the centralized power that the miners on one side have and the developers on the other. Those who flock to decentralized currency with ostensibly defined rules and equity, may grow weary of an increasing centralization of power among the overlords of the Bitcoin community, who are able to ensure the protection of their own interests over those of the users.
This inability to "shape-shift" to add new innovations quickly enough through governance and without forks is what appears to have led to newer coins such as Tezos. It remains to be seen how these types of coins function in practice, but their intention is to remove these issues that continue to weigh Bitcoin down, promoting timely innovation, governance without power broker centralization, etc.
The Tezos concept arguably has a much stronger chance of protecting the network effect once generated, since there is no reason to move to a different coin, unless you fundamentally cannot abide by what the majority has decided. There will likely be a number of "democratic coins" like tezos that go in different directions on issues, but it is difficult to imagine that, over time, most crypto users will choose to stay with a system such as Bitcoin where they have no real say and decisions are made by people who are looking to protect their own unaligned interests.
Further, the advent of services like TenX's payment card (or other similar cards) where you are able to pay at point of sale for literally any goods and services with instant conversions of crypto to fiat (and services like shapeshift where you can instantly switch from one crypto to another) may also further chip away at bitcoin's advantage of having established a network of merchants who will accept only bitcoin.
The current price of eos has floated between $1.50 and $3.00, with a billion shares planned to be issued. Futures for tezos are also at around the $1.50 mark. Many people will say that is not a fair valuation and argue about the market cap that the price implies. They may be right that the price is not fair, but, respectfully, IMHO the "analysis" of simply looking at market cap divided by number of coins is myopic and ignores the fact that chains can have different valuations based on underlying fundamentals, features, teams behind it and potential-for the same reason that some ico's/tge's raise far more than others do.
Just as you would be incorrect to value apple shares and blackberry shares in a "market divided by number of shares" approach, we are also incorrect to value all blockchains/tangles in the same manner. That would be an oversimplification of what should be, and is if done correctly, a very complex analysis.
Some have said that, in the future, with technology permitting you to instantly change any crypto coin for another, it may not matter which one you use. Some people cite the advent of the instant interchangeability of coins through shapeshift as the reason. That may be true to an extent, but it will only be true to the extent that all crypto-currencies are widely accepted as safe, reliable and effective stores and transfers of wealth. That is unlikely to be the case. Just as there are many hamburger shops that people could stop at, most will stop at places that they know or trust. It's that trust that will define a coin's intrinsic value and it's the network effect that will likely underpin the intrinsic value.
4.So is it a bubble?
With close to a 100 billion dollar market cap and acres of room to grow in what very well could be a trillion dollar industry, crypto-currency is here to stay. The price of a Bitcoin is directly related to its user adoption, which increases its network effect, which then in turn creates more user adoption.
Crypto-currency itself has real intrinsic value based on its system of safety, reliability and trustworthy storing and transferring of value and the coins themselves are differentiated by their present and future network effect, which is directly related to their system and ability to continue to meet market demands to incorporate ongoing innovation in a timely, secure and effective manner that has the benefit of its users as the first and foremost goal.
It is difficult to understand how people can describe the price of crypto-currency as being in a "bubble", if the price is directly correlated to user adoption and network effect. It may be one thing to say that a particular coin's price is rising too quickly for the network effect to catch up to the number of users, but arguably the greater the adoption, the greater the potential because of the likely increased network effect, which should point to greater gains in the future-not a bubble.
(This is not financial advice, the author is simply commenting on the current industry with personal thoughts and should not be interpreted as advice in any way shape or form).