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.
