Will Crypto Be Your Kryptonite? Signs The Bubnle Is About To Burst
There is without a shadow of doubt a “bubble” forming with “Bitcoin” and the various other “crypto” currencies.
Not only has their “price” skyrocketed, but not many people fully understand “why” they cost so much, nor can anyone actually explain their “value” – one of the most central pillars of investing.
Due to these obvious signs, the only conclusion is that each of the current “crypto” coins is woefully overpriced and – as seen time and time again – when this happens, the market eventually corrects itself. It might not happen immediately, but it will eventually happen.
This tutorial aims to dissect the way in which “crypto” currencies have ridden such a large wave and why the likes of Bitcoin are now trading at over $10,000 per “coin”.
In a time reminisce of the Tulip bubble of the 1630’s, it’s vital you know fact from fiction & are able to determine exactly who you should be listening to.
As ever, this is NOT financial or legal advice. If you are seriously considering the “crypto” market as a vehicle of growth for your money, you need to seek the opinion of a professional finance adviser. Since we are not regulated, we cannot do this…
What Is “Crypto” Currency And Where Did It Come From?
“Crypto” is one of the biggest lies in the modern financial world.
People are buying it because they *think* it’s a “currency” which has the potential to compete with the USD or GBP. This false assumption gives credence to the vast amount of money attributed to each coin, especially “Bitcoin”.
The reality is much different, and as such it’s important to consider what you’re getting involved with.
“Crypto” currencies are not currencies at all, but encryption algorithms for a new type of technology called “blockchain“. Blockchain was developed in 2008 as a decentralized database – essentially a way to store large bodies of data (such as a telephone directory) in a way which can be synchronized across 100’s or even 1000’s of servers (known as “nodes”) around the world.
The reason why “blockchain” is important is because it’s able to facilitate decentralized applications, which basically allows the likes of an Airline to store its entire data needs across a “network” of decentralized blockchain servers… rather than having to maintain the entire infrastructure themselves.
Not only could “blockchain” make “data” more accessible (giving rise to a standard platform through which it can be managed), but the idea of “decentralized apps” has given heed – in the technology world – to a new “age” of the Internet, called “Web 3.0”.
Now… the point about “blockchain” is that it’s NO DIFFERENT to technology today.
What it basically does is allow for ledgers of data to be stored across 100’s of servers, rather than relying on a central provider of data as is the case today. This means that rather than “data” being the source of wealth for a business like Facebook, it will be its wider application & integration in the world.
Without getting technical, the main problem with all of this is privacy. With the biggest problem facing networks today being that of data integrity, having “openly accessible” data spread across servers around the world is almost certainly going to make the problem worse. This is where “crypto” (cryptographic) currencies come in.
Crpyto currencies (specifically Bitcoin) were developed on top of the “blockchain” technology to provide specific use cases for the various “ledgers” it would help create.
For example, “Bitcoin” was designed as a “public decentralized ledger of financial transactions” and Ethereum was designed as a way to manage “smart contracts” (ledger of time-centric agreements).
In each case, the underlying “value” of the systems depends on their transactional value between two or more parties. The way this was managed was by creating “decryption tokens” which would facilitate the creation of said transactions. The tokens were called “coins” to make them sound more like a currency.
The CORE of all of these is that each “crypto” currency is essentially an encryption algorithm – designed to scramble a set of data stored in a “blockchain” database.
They’re not going to “topple” governments, bring about an entirely “cashless society” or take us to Mars. They’re just little files which require a particular “token” (“coin”) to decipher.
Through this lens, you can begin to see why many people are claiming their recent price spikes to be little more than a “scam”…
Why Are They “Priced” So High?
Mainly because people have fallen for the old trick of assumption – they have not realized that these “crypto” coins are NOT a currency at all.
The problem is that the “Bitcoin” phenomenon has been built off the back of several key elements which have pushed the price through the roof…
- People Think It’s a “Currency”…
The biggest problem is that people actually think “Bitcoin” (and to a lesser degree, the other “coins”) are currencies in their own right.And when you think of them like this, the “price” for a coin PALES in comparison to the “potential” it has in dethroning the USD as the world’s most traded currency.The only problem is NO… they’re NOT currencies in their own right. They’re simply ways to facilitate transactions in currencies which exist already.
Every time you transact with a “Bitcoin”, it’s done in USD (or some other local currency). This is partly why people have become confused. They think that “Bitcoin” is able to “hold” value with the likes of USD etc… because after all, fiat currency is just “printed”, right?
The reality is that most people have not considered that the “currencies” of the world are backed by the ECONOMIES they represent. The USD is the sum of American influence in the world, as is the GBP and EUR.
This means that if you wanted to buy a product using one of those currencies, what you’re actually doing is considering the “cost” of goods produced by their respective countries and comparing it to the product you want to trade. In other words, the various “currencies” in the world are able to hold
The same CANNOT be said about “Bitcoin” etc. Bitcoin represents NO economic area, and as such has very little by way of intrinsic value on its own. Its ONLY indicator of value is the transactions it can facilitate by way of where / how it is accepted around the world. And without a “regulated” and “stable” market to do this, everything you’ve seen so far is wild speculation.
- It Can Be “Traded”…
The rise of the various “digital asset exchanges” brought “traders” into the fray.Just like how the financial crisis of 2008 highlighted, banking and financial people are generally ONLY concerned with scraping a profit of a particular asset class.As such, it could be pebbles or sea-shells, if these guys get ahold of something, they tend to play their game until the asset loses so much value that it’s not worth dealing with anymore.
“Crypto” currencies are no different… however there is one major problem which has lead to the rampant growth of their price – the fact that “normal” people have put money into the market…
- People Have Piled In Their Life Savings….
The most obvious reason why the price has risen exponentially is due mainly to the way in which “normal” people have put their life savings into the various assets.With “normal” asset classes, since the supply of – say – gold or some other commodity is limited, people who “buy” the asset have been able to retain the value of their money by being able to “sell” said asset back on the market again.The problem with “Bitcoin” and other “crypto” currencies is that since the likes of Bitcoin has been creating new tokens (“coins”) continually, it’s been the equivalent of creating more gold bars… whilst increasing demand. This has lead to massive increases in the price, which will almost certainly correct some time in the near future.
In other words, all the “profits” you’ll see claimed by guys who bought Bitcoin when it was $200 will come from when some single mother put her savings into the market. Since each “coin” holds no value (unlike Gold), those savings will be wiped out when the house of cards collapses.
Signs Of a Bubble?
With this in mind, it’s important to consider whether what we’re witnessing is actually a “bubble” or not.
Whilst I don’t have a crystal ball, “Bitcoin”, especially, has all the hallmarks of a feeding frenzy. And by definition, when this happens, it’s typically built on hype and vapourware.
One of the best ways to consider whether it’s a bubble is to appreciate how it would act if it wasn’t – which is to say that it would grow organically in line with many fundamentals of investing… namely that it’s backed up by a legitimate scale of value.
The way “assets” or even “commodities” are meant to work in the general market is that people will purchase a “share” of their earning capacity through the issuance of “stock” certificates.
A company will sell shares to raise capital (either for growth or the likes of a management buy-out) – making these “shares” available for a fee gives the company money, but also means it has to commit to paying a dividend (split of the profits) to the various shareholders. Obviously, the scale and scope of the profit-earning capacity of a company will typically determine its price.
With commodities, the situation is slightly different in that they don’t “earn” money in themselves, and as such are traded primarily on the “price” they’d fetch if resold.
For example, “Gold” is seen as one of the world’s most ubiquitous commodities (because almost everybody accepts it as a form of trade), and as such its price is determined by how much of “X” you’d get for it at resale.
Bitcoin, Ethereum etc have no such indicators of price. They are not traded with any intrinsic value, and as such are mainly targets of speculation. When this happens – especially on the scale we’re seeing with “Bitcoin” (especially) – it’s almost certainly a bubble.