Lately, there’s been a lot of talk about a crypto currency bubble.
The answer really depends on your perspective. If you look at individual coins, sure as hell, there is a bubble. Gnosis is a prime candidate for bubble boy of the year (and the year is not even half done). More on Gnosis in another post.
But if you look at crypto currencies on a systemic level, then I’d say, “nah, it's not a bubble”.
Here’s my view:
1) Coins in general are speculative. But in my mind, I strongly believe that the use of digital currencies will grow. The continued growth in usage is not speculation. Which coins are most popular in 5 years, well, that you can speculate on.
2) Digital currencies are global currencies. Again, I don’t know if bitcoin (BTC) will be the prime coin to be used 5 years from now, but let’s run with this idea. As more nations provide regulation and as companies create easier access to the usage of coins, let’s say that BTC becomes the de facto global currency. If so, the market value MUST go higher to support widespread global usage. The current $30 billion in market cap may need to be 5+ times higher. In this scenario, BTC alone should support a $150 billion market cap. The current market cap of ALL coins, at about $50 billion, is therefore, undervalued at a systemic level.
3) Market penetration of digital coins is still small. I define the market as anyone who can be connected to digital currency through usage (utility) or trading (speculating for profit). Out of 7 billion people, let’s say that the viable market is adults and teenagers with access to a smartphone or computer who may have a “reasonable” chance of touching crypto within the next 5 years. Let’s put that number at one billion (I think that is a reasonable number). Where are we today? I’d be very surprised if the current market exceeds 100 million users (if anyone thinks diff, please share why). Coinbase.com states that they serve 6.9 million customers in 33 countries. If that is the case, given that Coinbase is one of the easier ways to get involved with crypto, I’d say that the other exchanges combined may not even exceed 6.9 million. But to keep the overall numbers conservative, let’s use the high end of 100 million users as the current market. If this all “sounds reasonable”, then the market penetration is only 10% (likely far less). That leaves a lot of room for crypto usage to grow.
IMO, we are not in crypto bubble at a systemic level.
So how do I define a systemic bubble in crypto? Try this scenario …
There is currently a wall between crypto currencies and a mountain of cash (Wall Street) on the other side. The reason that Wall Street cannot access digital coins is that a lot of their money is in highly regulated investment funds. In other words, they do not have permission to buy any digital currencies. The SEC (Securities and Exchange Commission) forbids it.
But a while back, Wall Street created something called an ETF. ETF’s, in a practical sense, is what allows Wall Street money to access hard to reach items such as oil, gold, and stock indexes. The SEC is currently reviewing an EtherIndex ETF and has opened up a review of a Bitcoin ETF that they rejected a few months back.
The relevance is depicted by the image below. Cryptos on the left, a wall in the middle, and Wall Street on the right. If one or both ETFs are approved, a small door in the wall will appear. And through that magic door, a big chunk of that cash mountain will funnel through and voraciously consume BTC and/or Ether coins like a pack of hungry wolves.
Not only Wall Street funds, but now anyone can get access to coins by buying ETF shares. Now, getting access to coins by John Doe is just as easy as opening an Ameritrade account and buying a share of Amazon stock.
And if that happens, give it 1-2 years. As the coin prices whip up like a tornado, when the taxi driver starts to give you tips on bitcoin, then we are in a systemic crypto bubble.
But as of right now, “I say nah.“