The Cryptocurrency Bubble
At the time of this article, there were 1,358 companies providing cryptocurrencies, and the total market cap was $538B.
SUMMARY
Mania
While Bitcoin and similar cryptocurrencies could be useful, the market appears to be a speculative bubble.
- “There remains no bigger mania among tech investors than cryptocurrency,” wrote Kevin Rose in The New York Times (2017, emph. mine).
- Bitcoin “has been captured as a speculative vehicle that’s in the middle of a bubble,” said Ray Dalio of Bridgewater Associates (Sept. 28, 2017, emph. mine).
- Bitcoin is “a fraud [... and] worse than tulip bulbs,” said Jamie Dimon, CEO of JPMorgan Chase & Co. (2017, emph. mine), referring to the Dutch tulip bulb market bubble that burst in 1637.
Ray Dalio’s brief analysis
Ray Dalio (2017) explained that while cryptocurrencies could be an effective possibility, there are current problems with Bitcoin: it is an ineffective medium of exchange and an unstable store of value (“storehold of wealth”), and it’s future privacy is uncertain. Specifically:
- It is not pervasively used as an exchange medium.
- As a store of value, the price greatly fluctuates – it is speculative and behaves “like a Greater Fool Theory.”
- There are alternatives in the marketplace, such as Ethereum.
- Governments are trying to reduce the secrecy.
Example of market instability
The cryptocurrency Dogecoin – created by Jackson Palmer to illustrate the absurdity of investing heavily in volatile enterprises (Rose, 2017) – had a market value over $400M last June, but fell to $100M in September, and is back up at $412M (coinmarketcap.com, Dec. 15, 2017).
More
For references and further research into this volatile market:
- Browne, R. (Dec. 11, 2017). Ethereum creator compares crypto mania to world’s biggest art auction. Published at CNBC.
- Cryptocurrency Market Capitalizations (coinmarketcap.com).
- Dalio, R. (Sept. 21, 2017). Conversation published in Business Insider [video].
- Dalio, R. (Sept. 28, 2017). Conversation published in LinkedIn (Dec. 15, 2017) (exerpt) [video].
- Dimon, J. (Sept. 12, 2017). As quoted. Article published in Bloomberg Technology.
- Investopedia: Greater Fool Theory; and Market crashes: the tulip and bulb craze (1630s).
- Rose, K. (Sept. 15, 2017). Is there a cryptocurrency bubble? Just ask Doge. Article published in The New York Times.
Note: picture by Alexandr Gromov. “Hashcoin mine” (cropped). (cc) license: Attribution-ShareAlike 4.0 International. Published at Wikipedia.
Michael, thanks for sharing!
Warren Buffet gave strong words this morning about cryptocurrencies: “In terms of cryptrrencies, generally, I can say almost with certainty that they will come to a bad ending. Now when it happens, or how or anything else, I don’t know. But I know this: If I could buy a five year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth” (CNBC).