No seriously are we really headed towards a crypto bubble? I see some significant similarities between the current state of the crypto market and that of the .com bubble of the late 90’s and early 00’s.
Bubbles Past
Back then it seemed like investors were clamouring over themselves to be invested in any company with ‘.com’ in the name. At a time when the internet and web had started to see broad and wide adoption amongst consumers, institutional investors in particular suffered from a serious case of FOMO (Fear of missing out), desperately trying to invest in the next .com success story.
As result of this pent up demand company valuations soared and traditional business models were thrown to the wayside to make way for the “Get big fast” model. Where by companies use investor cash to grow big fast make a land grab for market share, and worry about becoming profitable later. This practice led to lax and inexperience management with little accountability, and in some cases companies go public having now even released a product to sell.
When investors realised that these companies were shall we say ‘less stable’ than what they were led to believe, the bubble burst and many of these companies went to the wall. A few disruptors with real business models were able to weather the storm such as Amazon and EBay.
The fall out
At the risk of sounding too apocalyptic about the crypto industry, I see some serious similarities between the .com tech companies and the crypto markets. If we are indeed in a bubble and the market crashes, unlike the .com bubble where the fall out affected mainly institutional investors. A crypto market crash will have the potential to crush individual investors like you and I. Whilst people who have leveraged themselves to enter the market via credit cards or loans could be wiped out entirely.
Where’s the risk
I think it’s important to separate normal market forces from the risk that I’m talking about. It’s no secret that the likes of Bitcoin and Ethereum to name a couple have rocketed in price since their inception, and like any fledgling currency will see massive volatility which means large swings in the price. What these types of coins have in common is that they were created for a purpose, almost a mission for social good. For instance Bitcoin was created as a disruptor to the international monetary system, whilst Ethereum was designed to facilitate the trading of more complex securities in the digital world in a secure and safe way.
What I believe to be the risk and what is ultimately fuelling this bubble are what I call the fund raising coins. It seems that everywhere you turn there’s another coin going through an ICO process. Seem familiar? We are seeing huge growth in ICO’s by companies as their CEO’s see the process as a perfect way to raise capital, whilst early investors view ICO’s as a potential exist strategy. The benefits are plain to see, no investor, political or regulatory scrutiny and oversight whilst being able to remain in full control of their business.
We have seemed to have stumbled into an era where anyone can ICO a coin to raise money, without having to prove the viability of a business model, the existence of sale or profit. What is compounding this problem is an army of armchair investors, most of them being driven by their own cases of FOMO to buy into these funding raising coins before it’s too late.
The risk is so great that Charles Hoskinson Co-Founder of the Ethereum project recently shared his concerns in a Bloomberg news interview.
“People say ICO’s are great for Ethereum because, look at the price, but it’s a ticking time bomb.”
He goes on to say that “there’s an over-tokenization of things as companies are issuing tokens when the same tasks can be achieved with existing blockchain. People are blinded by fast and easy money”. So in a nutshell companies are using the pretence of creating a token to raise capital, not to facilitate their operations.
According to Bloomberg companies have raised $1.3 billion this year through ICO’s, which is more than direct venture capital funding into blockchain related companies. At the moment ICO’s are unregulated and therefore have no legal scrutiny or standards to uphold. But if the trend continues and we start to see companies that have ICO’ed fail or severely under achieve, I think it’s almost inevitable that regulators will step in. It just depends on the timing, think about it they weren’t too quick to the subprime party.
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