In mid-October, Bitcoin’s value hovered a bit under $6,000. Two months later, it hit the attention-getting peak price of over $19,000. And now, almost two months after this peak, its value is about $8,000. Bitcoin’s price increased 200 percent in two months, then lost almost all of that gain during the next two months. Is that normal?
Not really. “Bubble” is a fun-sounding term for a not-so-fun event. Investopedia defines it as “an economic cycle characterized by rapid escalation of asset prices followed by a contraction.” After exuberant, irrational speculation drives prices for an asset far higher than any sane person would say the asset really warrants, investors stop buying and a massive sell-off occurs very quickly.
Bubbles have been around as long as large trade systems have existed — a tulip bubble nearly crashed the whole Dutch economy in the early 1600’s. More recently, we can look at the “dotcom” bubble of the late 90s, when investors scrambled to buy into absolutely any internet company they came across, and the housing bubble that popped in 2008, an economic crisis still affecting our world today.
The Bitcoin market’s recent behavior sure makes it look like a bubble, and it’s not the only cryptocurrency that might be mid-pop. After following Bitcoin to a market cap high of $830 billion in mid-January, the total value of all cryptocurrencies fell in early February to $276 billion, a bar it hadn’t sunk to since November. The impending (or already-upon-us) pop of the cryptocurrency bubble has recently been proclaimed in legions of news sources, and cryptocurrency folks are either plugging their ears or hunkering down in anticipation of feeling some pain.
But is the bubble popping necessarily a bad thing? Ivan Goldensohn, CMO of blockchain company Dispatch Labs, recently argued in TechBullion that it’s not. ICOs have been singled out as especially bad actors in creating and popping the bubble; an astonishing number have popped up in the past year — CoinSchedule recorded 235 new ones in 2017. But Goldensohn claims that “In the ICO world, there is a massive gap between the speculative value of the cryptocurrencies and the actual usage of the services or networks those cryptocurrencies represent.”
He’s not alone in claiming this. CoinJournal reports that Ethereum co-founder Vitalik Buterin has stated 90 percent of ICOs launched on his own protocol will fail. Bloomberg reports only 1 in 10 ICOs have use cases and an actual product platform even months after their release. All others were held and traded as speculative products that might someday be traded in the ecosystem they were meant to be used in.
Of course, even if an ICO product gets off the ground, that doesn’t guarantee the ecosystem it operates in will be a healthy one. Goldensohn points out that Dentacoin, a cryptocurrency designed for dental offices, is technically “in use” in the dental world, but in such small numbers that its peak price seemed ludicrous (and then crashed). ICOs have been lauded as the answer to all fundraising problems, but the fact is that a lot of technological issues won’t necessarily be solved by incorporating cryptocurrency.
Launching an ICO, in short, is not synonymous with building a feasible product that generates real value and incorporates token circulation into its platform. This doesn’t mean ICOs have to be tied to a product that’s already generating value by the time they’re put on the market. One of the joys of supporting a new business is joining something that’s great before the rest of the world has realized it’s great. A good idea is worth a lot, regardless of how far along it is in the implementation process, and ICOs are one way of helping those ideas on their journey towards reality.
If the crypto bubble pops, those promising products that can really benefit from ICO usage in their platforms won’t have to compete quite so much in a market swimming in speculation. Goldensohn writes: “More restrictions on blockchain technology could hamper the abilities of the real companies out there to succeed. These new technologies are already struggling to rise above the sheer volume of bandwagon- jumpers and scam artists who are popping into the world of cryptocurrency and ICOs.”
Bubbles might need to pop for society to move forward. Marc Hochstein recently pointed out that while the dotcom bubble entailed a lot of frivolous companies and lost fortunes, it also genuinely and permanently changed our technological landscape, putting in place internet infrastructure that allowed the rise of many of today’s genuinely valuable online companies.
Jon Evans at TechCrunch recently wrote that the crypto bubble is “strangling innovation,” as valuable ideas get lost in splashy news about surging bitcoin prices. And blockchain is a truly valuable idea, set to foster many more. The New York Times also recently wrote about that potential for deep change in how our society stores and uses data in “Beyond the Bitcoin Bubble.”
After the bubble pops and the cryptocurrency world becomes one where money and valuable ideas are closely tied concepts rather than vague associates, blockchain users will need a feasible platform to exchange innovative ICOs, which is where companies like Dispatch come in. Another reason the Bitcoin bubble has popped is the massive transaction scaling issues it has faced. A leaner, stronger Bitcoin world will use a leaner, stronger protocol, promoting innovation even further.
How are you preparing for the cryptocurrency bubble pop?
The author has had a working or personal relationship with one or more companies mentioned in this article in the past. Access to mentioned company’s management and information was made through the author’s personal network. All information was vetted prior to posting.
This essay is not intended to be a source of investment, financial, technical, tax, or legal advice. All of this content is for informational purposes only.