Disclaimer: This is not financial advice. I am not a financial advisor. What follows is my personal, subjective, biased opinion.
Every day, both self-proclaimed and distinguished experts sit on TV, telling people Bitcoin is a bubble. New tweets pop up by the hour. But is it true?
They say where there’s smoke, there’s fire, but sometimes, pointing it out and yelling is like calling the fire department at Burning Man: premature. No one denies the growth of Bitcoin and cryptocurrencies has been astronomical, but the question is how many legit, logic reasons can we find for it to stop?
To help you answer this for yourself, I want to provide yet more context for Bitcoin in the grand scheme of history’s biggest bubbles. Welcome to this post of Bitcoin for Beginners!
Bitcoin for Beginners
1. Why Should You Care About Bitcoin?
2. 7 Ways Bitcoin Will Make You Rethink Money Forever
3. How Does Bitcoin Work?
4. Why Is Everyone Investing in Bitcoin?
5. Why Market Predictions Are Almost Always Wrong
6. Where Is Bitcoin in the History of the World’s Greatest Bubbles?
7. 7 Big Obstacles to Mass Adoption of Blockchain Technology
8. 3 Potential Paths Cryptocurrency Regulations Could Take (and Which One’s Most Likely)
9. The 15 Best Resources To Learn More About Bitcoin
10. Granny’s Bitcoin Cheat Sheet
Let’s go!
1637: The Tulip Bubble
About 400 years ago, tulips were all the rage in the Netherlands. A token of fleeting beauty, the newly imported good from Turkey quickly became a powerful status symbol. So powerful, in fact, that from November 1636 until February 1637, prices skyrocketed by a factor of 200.
Exact numbers are hard to find, but whatever the investment vehicle, once people collateralize their houses to join the hype, sanity has become too scarce in the market. After the value of a single tulip had reached heights no one could understand, let alone justify, the bubble collapsed within days.
This is a very common argument against Bitcoin. If people stop believing in it, won’t the value wither away? Yes, that is the case. However, the economic translation for ‘believers’ is ‘demand’ and there are plenty of irrational markets which, thanks to those, survive to this day. Modern art, anyone?
While the value aspect is similar not just for tulips, paintings, and Bitcoin, but for all things, including the world’s most dominant currencies, there is another factor that varies a lot: everyday utility.
If you play your cards right, you can start a breeding company from one tulip, but beyond that, it’s applications are limited and its beauty expires rather quickly too. With buying some Bitcoin, you get access to a permanent, immutable, borderless payment system. Even if you just use it to store your encoded memoirs on the blockchain, it’s a good way to keep information safe. And unlike tulip trading, the network becomes more useful the more people join.
Bitcoin one, tulips zero.
2000: The Dot-Com Bubble
If you were a tech company in 1999, it was almost considered common courtesy to go public. In Zero To One, Paypal founder Peter Thiel recalls:
“One acquaintance told me how he had planned an IPO from his living room before he’d even incorporated his company — and he didn’t think that was weird. In this kind of environment, acting sanely began to seem eccentric.”
Same pattern, bigger numbers. In March 2000, the combined value of all Nasdaq-listed firms was $6.7 trillion. That’s a lot of zeros. Cisco, the most valuable company in the world at the time, had 2,500x-ed its 1990 IPO evaluation, making up 10% of the entire internet market.
Bitcoin first hit $8 in May 2011. At its all-time high around $20,000, it also 2,500x-ed its evaluation, but in seven years, not ten. The return from initial price is even higher. Interesting. However, so far in 2018, the average size of the whole crypto market is about $500 billion. Bitcoin holds 30%-40% of that. And that share has been going down, not up, because BTC is how it all started.
So while we have a few high individual coin evaluations already, the battle for market share has just begun. The hype is here, but the overall size of the bubble is still tiny. We need another 13.4 multiplier, just to get to 2000 highs.
Besides the market still having plenty of room to blow up (pun intended), in both the dot-com bubble and the current crypto scenario, utility is a big differentiator over the Dutch flowers.
Of course a lot of companies got wiped out, not just for being useless, but also for simply failing. Competition, pricing, innovation, the global economy is an antifragile entity that follows the evolutionary process, and these are real threats, even to the best of players.
Will 95% of cryptos bite the dust? Probably. Will the 5% that remain become Amazons, Googles, and Facebooks? Probably. The reason a lot of both first-time and seasoned investors prefer to start by putting their money into Bitcoin is the Lindy effect. It’s been around the longest, has the biggest network, and a simple architecture, which increases its chances of survival.
A guarantee? No way. But no matter when a bubble pops, something always remains. Even if it’s just ruins.
2008: The Real Estate Bubble
In 2006, the value of US real estate peaked at $22 trillion. So did the debt used to float much of that value.
Another peak lagged slightly behind: In 2007, the number of people defaulting on their mortgages hit critical mass and by 2008, the first big banks went under. No matter how you tally up the numbers for the global financial crisis, they always end up in trillions.
- The economic losses were $12.8 trillion.
- The home owners lost $9 trillion by 2011.
- The stock market eradicated another dot-com-sized portion: $6.9 trillion.
Trillions, trillions, trillions. No matter where you look. Besides reiterating the room-to-grow theory, the scale of the great recession tells us another interesting thing about Bitcoin and cryptocurrencies: This market is currently neither mature, nor big enough to affect the economy in a big way.
Regulation and big institutions are just slowly warming up and even if the entire market went under, it wouldn’t even cause a blip on the radar, let alone trigger a new crisis.
But the most interesting bubble to compare Bitcoin to is one I never see anyone talk about. Maybe because it’s been there since the dawn of money.
Always: The Inflation Bubble
Language is one of the most powerful human tools and it works in sometimes eerily accurate ways. In this case, a lot of people shout ‘bubble,’ but few have looked at the most absolute condition for one to form: inflation.
Economically speaking, inflation is when a nominal increase in value, which means prices, exceeds a corresponding increase in utility. Last year, a pretzel cost $1, this year, it costs $2, but the pretzel itself hasn’t gotten any more useful for me. As a result, I just get less for my money, inflation is 100%.
While some inflation is considered a sign of a healthy economy — consumers earn more, spend more, then that money is used again for innovation — we’ve had more than our fair share of it in the Western world in the past century. My grandma recently showed me a bank note her mother had kept for her:
That 1923 bill is worth 200 billion German Mark and it stems from a period of hyperinflation in the Weimar Republic. While those situations are rare, the consumer price index, which tracks the cost of a bag of normal goods, like cheese, toilet paper, diapers, etc., has also skyrocketed in the past 50 years.
What cost you $1 a hundred years ago now costs you $28. That makes holding on to your dollar bills as literal paper money look like a bad idea and it usually is. Between 2000 and now, prices have gone up almost 50%. So that dot-com bubble? It’d be almost $10 trillion today.
Much of these price hikes go back to the excessive money printing programs the US Federal Reserve and European Central Bank have engaged in post-2008. It’s called quantitative easing. Since March 2015, the ECB has bought 60–80 € billion worth of bonds every month, totaling almost $4 trillion in new money. And they’re not stopping. Add $4.5 trillion from the Fed and you’ve got a total of 17 crypto markets, just from inflation we’ve created on purpose.
Now that’s a bubble.
If Bitcoin’s a Bubble, It’s OUR Bubble
Each generation has its own struggle. For the generation that will determine much of the world’s progress for the next few decades, millennials, the struggle has mainly been a financial one. The dot-com bubble, the financial crisis, inflation, student loans, flat incomes and less job certainty than ever.
Imagine after all that, an idea of money came along that wasn’t fueled by greedy banks, but by the people who spend it. An idea of money built on the tech you grew up with, are familiar with, and kind of understand. An idea of money that, to top it off, might make you rich or allow you to retire in peace.
How would you react? It’s no wonder cryptocurrencies are so popular. Our generation has been dying for a change. What’s more, since the internet has sped up how quickly new technologies spread, mass adoption happens faster and faster. We can bet on crypto and see it through, all in one lifetime.
However, don’t let my enthusiasm fool you. We don’t know how to handle bubbles better than the people who came before us. Look at r/cryptocurrency. We all suffer the same emotional flaws. But we’re sick of being left out.
We want our bubble and we want it now. The bubble that floats US to the top. And we believe in it with all we’ve got.
In all prior bubbles, the big guys made their money first. The banks, the hedge funds, the VCs and the governments. Only once the last cab drivers and housewives had entered the space, the bubble would pop. But this time, it’s different. We, the cab drivers, the housewives, the students, the academics, the young professionals and the average Joes, we were here first.
So maybe Bitcoin’s a bubble not done swelling and if we’re not smart, it’ll blow up in our face. But maybe it isn’t. Maybe, this really is different than tulips, dot-coms and overpriced houses. What if Bitcoin isn’t the bubble, what if it’s the pin? Only time will tell and we’ll all get smarter along the way. But one thing is for sure: It’ll be one hell of a ride.
Because regardless of what happens, Bitcoin is us.
