Are we in a bubble?

Exhibit 1. ICO Funding June-July 2017.

source: coindesk.com

That is the question. Just in two months, more than $1 billion has been raised by some 51 projects. 

Exhibit 2. Crypto Currency Market Cap Growth.

source: coinmarketcap.com

What is even more bubbly is that the market cap for all the cryptos from July 16 to August 31 has almost tripled; and whether we look separately at the bitcoin market cap vs. the market cap for all the cryptos excluding the bitcoin, the growth has been remarkable. Actually, the latter has experienced a greater growth in market capitalization. Why have we experienced this exuberant growth even by crypto standards since July 16, I haven’t been able to figure out. Maybe there is no rational explanation. I am not aware of any significant economic or political event that took place around that time (but I don’t generally follow closely what is happening in the traditional markets anyway). If you believe, you know, please comment.[1]

[1] Perhaps, it is when the institutional money started entering the market in a major way. But the question remains, why July 16?t.

How do we know (if it is a bubble)? – Generally, a bubble is a rapid growth in asset prices not supported by the fundamentals. Even when we are talking about traditional assets, usually we don’t know that we are in a bubble until it bursts, but when it comes to a completely new (paradigm shifting?) asset class such as cryptos – what are the fundamentals? I personally don’t know, do you? – Again, I would love to hear from you. Yes, we can talk about supply and demand. At least when it comes to the bitcoin, it is usually assumed that the supply is fixed at any point in time (which is true from the technical angle, but not from the economic, more on that below) and the demand can be categorized as:

a.    Transactional

b.    Investment

c.     Speculative

Furthermore, a formula can be derived:

where

P – Price

T – Total transaction value mediated via BTC ($/sec)

D – Duration that BTC is needed for a transaction (while the transaction is being settled, the bitcoin is temporarily taken out of circulation)

S – Supply of Bitcoins (not including Bitcoins that are held as long-term investment)[1]

[1] Princeton University: Bitcoin and Cryptocurrency Technologies (coursera.org)

Exhibit 3. Bitcoin Fundamentals: Supply & Demand.

Exhibit

Here we assume that the real supply has decreased because investors choose to hold on to more bitcoins it as a long-term investment; and that the transactional demand stays constant (this claim is supported by Exhibit 4).

Exhibit 4. Bitcoin Transactions Per Day.

At least when it comes to bitcoins, we have some semblance of analysis, but when it comes to the countless ICOs and a plethora of new cryptos (or tokens) that multiply by the day, we have even fewer tools at our disposal. 

I believe, that most of us who are in this space, have had this reaction in the past couple of months: “How the f*ck these people have been able to raise $10 (30, 50, 100…) million with that crappy project!?” 

For the sake of those of us who are actually using an ICO to raise funds for serious projects, there should be a better way of assessing the value of all the cryptos as well as the prospects of the upcoming ICOs.