The total market cap for crypto-currencies is currently $150bn.
For an outsider looking in, the rise of cryptocurrencies can raise eyebrows. Every other news story talks about a bubble, and the stories frequently compare the market capitalisation of crypto-currencies to current markets.
The stories will discuss how ridiculous it is that something based on software with no physical representation can be worth $150bn.
They will then throw in mentions of the Dark Web and words such as “fraud” to spook readers into thinking of cryptocurrencies as something used by illegal third parties.
But all this distracts from the bigger picture.
We read the same stories twenty years ago, when internet startups were selling for $50m or raising $100m, or when Amazon had a market cap of over $1bn, without turning profit.
The bubble of 2000 means we are still cautious about high company valuations today. However, many companies – whose valuations were laughed at then – are now being used by the very same people who wrote negatively about them.
And the crypto market looks set to follow a similar pattern.
Concerns that we are in a bubble are, in our view, based on a fundamental misunderstanding of cryptocurrencies.
The first misunderstanding relates to the benchmarks critics are using to make a judgement. Those who relate the crypto market to the supposed Tulip bubble of 1636 are evaluating crypto based on conditions from 400 years ago. This makes no sense.
Concerns are also raised that cryptocurrencies are simply “ideas”. How then can the market cap of cryptocurrencies be rising so quickly in comparison to that of well-established FTSE listed businesses? How can these “ideas” warrant their current valuation?
Again, people are picking the wrong benchmark. Rather than criticising the idea of crypto in comparison with established businesses, critics should attempt to reach a deeper understanding of the concepts and their potential.
To those who benchmark cryptocurrencies against real world currencies, claiming the crypto market facilitates illegal activity, I’d ask which currency do you think is used to purchase the most drugs in the world? More drugs are purchased using the US dollar than any other currency. Yet we are not denouncing dollars altogether. Again, the benchmark for making a judgement on crypto seems wrong.
A second misunderstanding relates to market swings. We do not know for certain if cryptocurrencies will be a success or not. But what we have seen is that every time a negative piece of news affects the biggest cryptocurrency by market cap – bitcoin – it always bounces back.
Many investors hit the panic button and sold out after bitcoin split in two (to include bitcoin cash), and after China announced it would clampdown on cryptocurrencies. And yet bitcoin recovered to $4,000 within a couple of days. It appears that some investors in bitcoin – those driving the price back – may understand a little more than most.
Suggestions that $4,000 for a bitcoin token is too high – and must suggest a bubble – are misplaced.
Most people are failing to recognise that ultimately no one will spend a single bitcoin. In the same way, you do not spend a bar of gold – you buy and own the smaller denominations. Bitcoin will be the same. You will spend the underlying asset: the less talked about satoshis.
Each bitcoin contains 100m satoshis. With a bitcoin currently worth around $4,000, one satoshi is worth $0.00004. Suddenly talks of a bubble seem off the mark.
Today, no one who understands bitcoin plans to spend a $4,000 single token. They will wait for the satoshi to rise in value, then spend these.
Lastly, we regularly hear that bitcoin is not backed by anyone. This raises concerns that price hikes have little grounding and that the cryptocurrency is less stable than other forms of payment.
However, fiat currencies are not backed by anyone either. In reality, currencies are only backed by a promise from the government they will one day be worth something. Of course, this does not always bode well. Venezuela is a case in point.
Cryptocurrencies have much further to go before the scale of their real world applications is fully realised.
An investment in cryptocurrencies is an investment in the idea that blockchain technology can remake the way our world operates.
The story that follows will no doubt be a page turner. Investors should prepare themselves for short term volatility as markets react to news, and as the market seeks reassurance from the regulator.
Investors in cryptocurrencies should invest with excitement for their future potential, but also with caution. Are we in a crypto bubble? It’s not something I’m calling any time soon. After all, we’ve just started the story.