The question is a valid one. The answer begins in agreeing on a definition of that word Bubble.
Where better to seek out a definition than that trusty old source, Investopedia, according to whom a bubble is defined as:
” …an economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior. When no more investors are willing to buy at the elevated price, a massive selloff occurs, causing the bubble to deflate.”
That sounds like a reasonable enough definition to me. So the next question is, does it apply to Cryptos? Well, I’ve argued in a separate article that Bitcoin currently is indeed a bubble. Some see that as a controversial view because it is translated as an attack on Bitcoin itself.
I’m not setting out to attack Bitcoin; I’m quite fond of it – as far as one should be allowed to be fond of an inanimate concept underpinned by ones and zeroes. I am, however, interested in trying to take a handle on objective reality – and my (albet warped) perception of that reality tells me:
- Most buyers of Bitcoin are buying Bitcoin for the sake of buying Bitcoin in the hope of seeing its price rise
- Most ICOs are coming to market are not a Blockchain fit
So, Yes, We Have a Bubble But…
So, yes, I think we have some grounds now for arguing that the Crypto universe is currently defined largely by bubbles – i.e. asset prices, as per our definition above, that do not reflect underlying fundamentals.
At the same time, I don’t think any of this is a problem. If you avoid jumping onto ICOs because they are being hyped up by discussion forums, and if instead you apply a modicum of discernment to your investments, you might find that you can make all of this work in your favour. The reason I say this is because we have been through a very similar experience in the not-so-distant past: the dot-com bubble of the early noughties.
The internet was still a new thing for most people and I myself can remember that in 2001, I had barely been using Google for a year at that stage. The World Wide Web had captured the general imagination, and people allowed that same imagination to run wild. If you grew up with the internet, on the other hand, it might be difficult to gauge just how revolutionary it seemed to everyone back then.
The Blockchain concept and its somewhat avidly enthusiastic offspring – aka ICOs – are exposing us to something similar today. And my suspicion is that, just like the last time when we saw 90-95% of those tech start-ups fail miserably, we are going to see something similar for ICOs, but we are also going to see the other 5-10% of ICOs – which are underpinned by a solid concept, backed up by solid teams and following promising roadmaps – offer real promise for stupendous growth.
Initially, however, just as we saw in the tech bubble, even these eventual successes will find themselves being dragged down when the crash finally does come but, unlike the others, they will be underwritten by legitimate business models that will allow them to weather the storm and later rise to become giants in their field.
The trick, then, is to figure out how we go about identifying these future Blockchain triumphs. There is, of course, no magic formula – but there are a series of pointers that are likely going to serve as useful filters to bring mould your eventual basket of investments into a profitable stake when aggregated together.
Traditional Finance Won’t Provide The Answers
So what are those pointers? Well, that will be a result of hard work, study and experience – once a bit more time has passed and we can get a few more of these ICOs under our belt.
Traditional finance methods won’t be able to give us too much of a hand here. ICOs are concepts, by and large, not really-existing entities that publish annual reports of their Balance Sheet assets or Revenues – not that these actually serve up very accurate pictures of the health of a business given the margins that exist for creative accounting even in a legal context.
Personally, I’ve read through what must be over three dozen white-papers from head-to-toe now. And I am now watching those same ICOs hit their sales and post-sale periods.
Whilst it’s early days, the signs are that the truly promising ICOs are betrayed by a set of characteristics that are ultimately a universe apart from traditional business models. We outline those characteristics elsewhere on this site.
Whilst we stand by the assertion that we are now at the beginning of a bubble period, we remain optimistic – with due diligence and applied research and a pinch of common sense, we can make sure we come out ok on the other side. We just need to make sure that in the weeks and months ahead, we take note of the ICOs that are demonstrating real signs of growth and market capture, and compare back to our original notes.