19 September, 2017
Cryptocurrencies have burst onto the scene this year in no unmistakable way…
Bitcoin (the forerunner of all the crypto-currencies) has seen phenomenal gains the past few months of 393% in 8 months (and over 2000% gain in just 2 years).
The question arises:
Bitcoin’s meteoric rise simply dwarfs previous financial market manias, be it the Tulip Mania in the 1630s, the South Sea Bubble of 1711, the Dotcom Bubble of 1999/2000, the US Housing Bubble of 2007/2009.
Whereas Tech Stocks (Nasdaq Index) took 8 years to gain tenfold in price, Bitcoin has taken just a quarter of this time for the same gains!
Click to enlargeMany will remember the hype of the Dotcom Bubble, as internet technology took the world by storm – and every techno geek was climbing on the bandwagon to get their share of a market that was expected by all to grow at an exponential rate indefinitely.
Hundreds of start-ups launched on the Nasdaq stock exchange through IPOs (initial public offerings), with many of these being based on no more than an idea (if that)…
…and what is more, persons invested in them – simply because they believed they could not lose in this sector of the market (all shares were rising), and everyone was saying this market could only continue rising…
…until of course it didn’t …
…then CRASHED – spectacularly!
Over the next 12 months, the Nasdaq Index lost 72% of its value – and tanked by 87% before it finally reached rock bottom 2½ years after its long forgotten euphoria-driven peak…
…leaving behind market in tatters, looking much like a Caribbean island after it has been hit by Hurricane Irma, with damages and casualties aplenty, and a long road to recovery ahead.
BUT…the technology that was the engine of this bubble – the internet – not only survived, but thrived.
And those companies that saw the opportunities to harness its power to offer real value have not only survived to this day, but have also thrived, with the likes of Apple, Amazon & eBay being prime examples.
So, that leaves us with some questions as to where we find ourselves today
Are we in DotCom Bubble #2?
Undoubtedly. All the signs of a mania are present:
- The meteoric rise in Bitcoin’s price especially the past couple of months.
- The hundreds of crypto-currencies that have launched in recent months through successful ICOs (Initial Coin Offerings), some with significant value (like Ethereum), and some with no value at all – like the brutally honest founder of Useless Ethereum Token (see https://uetoken.com) who got funded over $92 000 in return for some useless crypto coins!
- Investing in cryptocurrencies has hit front pages of major newspapers and magazines.
- Every Tom, Dick and Harry (and your granny) is asking about buying Bitcoin and cryptos and wanting to get on board, expecting it can only go higher.
Will the crypto-currency market bubble burst?
Inevitably, yes, as have all financial bubbles historically.
In fact, at the time of writing this has likely already happened, with Bitcoin having tumbled since the beginning of September. If so, expect further significant losses before we see a bottom.
Will crypto-currencies survive?
Yes, and not only that, but the value-based ones will thrive.
Firstly, Bitcoin, and other value-based cryptocurrencies like Ethereum are here to stay, as much as governments are trying their best to counter them, because they offered a non-regulated international medium of exchange and a private portable store of value (a Swiss bank account in your pocket).
But, more than that, Blockchain (the game-changing technology that Bitcoin and other cryptos are built on) is likely to revolutionize the world as we know it – just as the internet did.
And those that see the opportunities to harness its power to offer something of real value will not only survive, but thrive.
And lastly, why do financial market bubbles burst?
As humans, our decisions are emotionally driven, and we rationalize these will logic thereafter. These combined emotions pf the masses drive the market from one extreme (of greed and complacency) to the other (of fear and despair).
When a market reaches a mania stage, our emotions are taken up with what everyone else is doing (our only logic is that there is safety in the crowd, right?) and we don’t want to miss the opportunity everyone is talking about, so we follow the herd.
But when everyone has bought into the opportunity, there is no-one left to join the herd and push the market up…it can only go one way … DOWN (like lemmings off a cliff)!
This has happened time and again.
Warren Buffet has some valid advice at times like these:
“Be fearful when others are greedy and greedy when others are fearful.”
Great lessons to be learned from history…but do we ever learn?
It does not seem like it.
To your success~
James Paynter
