Bitcoin has reached $17,000 as of the date of this article. The valuation of all cryptocurrencies is at around $500 billion. Wow! (If you just want to know how high it might go, skip to the end of the article.)
The price of bitcoin has doubled in the last 3 weeks. Just recently the Coinbase app which is used to buy bitcoin became the most popular app on the Apple app store. All signs are pointing towards an asset bubble. And this may be the largest asset bubble of all time as it’s arguably the first truly global investment mania.
Some manias throughout history
- Nasdaq Internet Bubble (2001) – The market soared from 500 to over 5,000 in 10 years before plunging 80%.
- Japan’s Real Estate and Stock Market Bubble (1989) – At its peak the value of real estate of the imperial palace in Tokyo was worth more than the entire state of California.
- The South Sea Bubble (1720) – Shares rose by 800% in 5 months before collapsing and causing a several economic crises.
- Dutch Tulip Bubble (1637) – Tulip prices rose by 2000% in 4 months before plunging by 99%. At its peak one tulip bulb was worth more than a luxury home or an entire ship.
Valuations of Initial Coin Offerings (ICOs) compared with traditional startup funding
Bitcoin is one of over 1,000 cryptocurrencies. Many of these other cryptocurrencies are initially released through ICOs (initial coin offerings) to raise money for a project which is supposedly creating a new blockchain technology. Many ICOs do not have a product (they are working on it!), and they raise money with little more than a website and a whitepaper (a pdf document). They’re raising money solely on the speculation that they will create something great, with little or no evidence that they’ll succeed.
There are many examples of ICOs that launched months ago and are valued at extreme levels despite still having no operational product. For example Augur is currently valued at $308 million, and Ardor is valued at $530 million.
The equivalent valuation for a startup with conventional funding would be between $500k to $10 million. However this is usually for a startup that already has a product, some revenue and a solid team. Very few conventional startups can get funded with just a “whitepaper” and no product. Most startup founders work hard without pay for months or years on their product before they’re able to get enough traction to raise some money.
ICO valuations are completely crazy compared with traditional startup fundraising.
There is a limited supply of Bitcoins!
One of the arguments for the continued price rise of Bitcoin is that there is a limited supply. This is true, but you can also create a million other cryptocurrencies! In fact I think I might create a Rob coin and limit it to 10 coins so the price should go up to $10 billion per coin because the supply of my Rob coin is extremely limited. If anyone wants to pay me $10 billion for a Rob coin let me know.
Security issues with cryptocurrencies
The extent of theft and hacking with cryptocurrencies is extraordinary. Here are some of the larger amounts:
The amounts in US dollars were a lot smaller at the time the money was stolen, however if the hackers kept their money in cryptocurrency this is how much they would have right now. As you can imagine, the possibility of stealing $2.6 billion is an enormous incentive, enough to mobilise the best hackers in the world.
There are many other public hacks, and there are also many individuals who have had their money stolen from them personally. A more recent successful hack attempt was 4,700 bitcoins stolen from NiceHash just last week (Dec 6, 2017), with a USD value of $75 million. It’s also common that individuals lose their Bitcoins due to forgetting their password or having their computer die without a proper backup.
Most of the larger thefts have happened from exchanges or wallets. The amounts of stolen cryptocurrencies are much greater than total money stolen from conventional banks. As you can see there is a MASSIVE security issue with cryptocurrencies.
There are just under 17 million bitcoins in existence today. Over 1.2 million bitcoins have been stolen. This means that over Bitcoin’s short life, 7% of all bitcoins have been stolen.
The most recent hacks were from the Parity cryptocurrency wallet. These hacks were possible because of flaws in the Parity code base. You can argue that the Parity coders just didn’t spend enough time on security, and that if you had someone with more experience they would get the security right. So perhaps you just need to spend more time on security and it will all be ok?
This is a flawed argument. One of the founders of Parity is Gavin Wood. He is also the founder of Ethereum itself (Ethereum is the second largest cryptocurrency after Bitcoin). If the founder of the core technology can’t get security right, it shows that the technology itself is deeply flawed and there are likely many high profile hack attempts to come in the future.
Cryptocurrencies are the ideal target for hackers and thieves
When someone steals money from a bank using a wire transfer, the money can often be recovered, When the bank discovers the theft, they can often talk with other banks involved and reverse the transactions.
With cryptocurrencies, transactions cannot be reversed. This may sound like a security benefit but in actual fact it’s a major security flaw. Combine the fact that transactions cannot be reversed with a degree of anonymity and that fact that the money easily passes across borders, and cryptocurrencies are a perfect target for hackers and thieves. Thieves know that if they steal the money they can usually get away with it.
Cryptocurrencies may be secure but everything else is not
The problem is that everything around the blockchain is not secure:
- Computers are not secure
- Mobile devices are not secure
- Email is not secure
- Phone calls are not secure
- The code written on the Ethereum blockchain is often not secure
So hackers and thieves can target everything around the blockchain and they are able to get away with the theft because the transactions cannot be reversed.
It’s incredible that the hyped up market is ignoring the risk of these major cryptocurrency thefts. People looking to make a quick buck are taking two major risks: the market could collapse or their money could be stolen.
How high can the cryptocurrency bubble go?
Price of Bitcoin, April 2017 to present. Source: tradingview.com
I would argue that the recent Internet stock bubble of 2001 is the most comparable situation. When it collapsed, the top 280 Internet stocks dropped in value by $1.7 trillion. That’s equivalent to $2.37 trillion in 2017 dollars after accounting for inflation. I would take that as an approximation of how much those stocks were overinflated because of market hype.
A hairdresser told a friend of mine that she’s mortgaging her house to buy bitcoins. The bubble is definitely here. How high it can go is anyone’s guess, but I think this is arguably the first truly GLOBAL asset mania. It’s also incredibly easy to buy bitcoin or an ICO. There are many websites where you can literally enter your credit card details and buy bitcoin in 2 minutes. In the heat of the moment when someone feels that they are missing out on the incredible price rise of bitcoin, they can whip out their credit card and purchase $10,000 on the spot. This was not possible in the stock bubble of 2001.
I think this mania could be unprecedented in its extent and if it goes high enough it could harm the global economy. I think it can at least reach the heights of the Internet Bubble of 2001. This means the valuation of all cryptocurrencies could go up to $2.37 trillion dollars. That represents a rise of 460% from today’s prices and is equivalent to a bitcoin price of $92,000 USD. Do not take that as a recommendation to buy bitcoin!
What do you think is next for bitcoin and cryptocurrencies in general?