A bubble or ...?

"The best way to predict the future is to create it! Abraham Lincoln."

In the above diagram, you can see the most famous bubbles in financial history. As early as 1841, bubbles were described in Charles McKay's book "The Most Common Misconceptions and Madness of the Crowd". Until now, this book remains a desktop for financiers and investors. However, McKay's book does not provide an explanation of the nature of the bubbles. Most of them he reduced to frank fraud and deceit. In reality, everything is much more complicated. When the bubbles burst, not only the lowly educated crowd was ruined, but also experienced financiers and representatives of the establishment. Even the great I. Newton lost all his money in the bubble of shares in the South Seas.

Finally, we sorted out the nature of the bubbles only in the 20th century. The economic basis of bubbles was first discovered and researched by Chaim Minsky in his great book "Stabilizing an unstable economy". The socio-psychological and behavioral aspect of investment bubbles was studied in detail by the recent Nobel laureate R. Shiller in his book "Irrational Optimism. How reckless behavior drives the markets. "

If financial pyramids are always fraud, then financial bubbles are generated by a combination of excess money from investors with the psychology of the crowd, which is ruled by fear and greed. In the classical theory of financial bubbles, developed, including R. Schiller, the formation and bloating of bubbles can be explained as follows. Under the influence of the growth rate of an asset, there is an agiotage demand. As a result, the market price of the asset increasingly exceeds the so-called fair price. This leads to the effect of a snow avalanche. As a result, at some point the most far-sighted investors decide to fix profits and sell the asset. When bears - playing on a slide - is getting quite a lot, the process of mass purchase is replaced by an avalanche sale. The bubble bursts, and assets are devalued, often to zero.

This scheme is used by the overwhelming majority of experts - theorists and practitioners - to understand the future of bitcoins and tokens in general. It is pointless to argue that the psychology of the crowd is fully realized in investment markets. Experienced investors know that markets are driven by fear and greed. And crypto-currencies are the best confirmation of this exchange truth. The external similarity of the price dynamics for crypto assets with a visual representation of the bubbles of the past has become, as it seems, the main factor in determining crypto assets as a financial bubble.

However, a person who carefully read Minsk, Schiller, Sornetti and other profound researchers of behavioral finance inevitably thinks. The theory states that the financial basis for the formation of a bubble is not only excessive monetary resources, but also the tendencies of securities and other investment assets to bow out from the so-called fair price. That's where the dog fumbled. Investors know that a fair price is a price that includes economically justified costs, and profits do not exceed the average for similar segments of financial markets.

Here there are puzzled questions. What costs are considered reasonable, and which are not, in relation to the tokens? What is the average market profit? In the current financial system, there is no concept of average market profit for investment assets, if only because the major players in the financial markets - the largest banks and asset management companies such as BlackRock - receive billions of profits simply from the air, without actually bearing any costs. For example, during 2010-2017 years. they received trillions of dollars and other reserve currencies directly from central banks for a long time, at worst 2-2.5%, and sometimes cheaper.

There is a paradoxical situation. Undoubtedly, the dynamics of the bitcoin rate and the overall market of tokens are really one to one, and today it exceeds the dynamics of financial bubbles of the past. Present in the behavior on crypto market and all the signs of the psychology of the crowd, driven by fear and greed.

However, the question arises. A bubble is the essence of crypto assets, or a form of fundraising that hides something much deeper and more important? To answer the question, let's look at the past and return to the diagram illustrating the bubbles of the past. Among them there is one that was a bubble in form, and an investment instrument in substance.

In 2000, one of the greatest bubbles burst, the so-called "Dotcom bubble " or shares of Internet companies. Despite the external similarity with the bubbles of the past, he had a key difference from them. Previously, when bubbles burst, asset prices were reduced to almost zero, and relevant projects and businesses were closed.

Thus, crypto assets are basically not financial pyramids and bubbles, but a product of investment-behavioral engineering. This fundamental conclusion does not negate the fact that a significant part of the ICO in 2017 was at best a little amateurish character, and to some extent was carried out by scammers. The dynamics of crypto assets are managed not by the invisible hand of the market, but by experienced designers. At the same time, of course, they do not try, and can not, control the course of each individual cryptoactive at each moment of time. The essence of purposeful management in another is in the formation and strengthening of the trend.

In any case, everything is just beginning ... and we should only emphasize the fact that we are entering a new digital era!