With bitcoin’s recent price explosion, anticipation over the possibility that we’re heading towards a bitcoin bubble is building.
(That doesn’t mean you shouldn’t buy bitcoin… as I wrote here)
This week, I attended Consensus 2017, one of the most important events in the blockchain world.
Consensus is an annual blockchain technology summit in New York where industry leaders discuss all things bitcoin and blockchain, and where new blockchain companies come to pitch their ideas.
Regular readers are familiar with bitcoin and blockchain. Bitcoin is digital money that is created and held electronically. At the core of bitcoin technology is a super database called the “blockchain.” The blockchain contains every transaction in the history of bitcoin and is accessible to anyone.
A lot of people think that blockchain will eventually be used to process everything from stock trades to voting.
I first recommended buying bitcoin back in March. Over the next two and a half months, the bitcoin price soared 72 percent.
Earlier this week, I reiterated my recommendation to buy by saying: “stop procrastinating!” Guess what? Bitcoin price is up another 20 percent since then.
But the rollercoaster ride isn’t done yet. One of my biggest takeaways from Consensus was that the boom in bitcoin and blockchain is just getting started. Everywhere I looked, conference attendees were on mobile phones and laptops trading cryptocurrencies throughout the course of the conference.
Here are just a few of the things I learned at the summit:
Forget about the bitcoin bubble. Right now, the bitcoin price boom is fueling more cryptocurrency rallies
The market capitalisations of the two largest cryptocurrencies, bitcoin and ether, have increased by nearly US$40 billion in the past three months. The total cryptocurrency market cap is up by $65 billion (a nearly 300 percent gain) to US$85 billion.
As a result, holders of these currencies are sitting on huge wealth and they are now looking to “diversify” into other cryptocurrencies. This means that instead of being 100 percent in bitcoin and/or ether, investors are looking to take 5 or 10 percent of their cryptocurrency portfolio and buy other cryptocurrencies.
This is fueling a boom in second-tier cryptocurrencies.
As I listened in on pitches from new blockchain businesses, the most common single question was this: “when is the ICO?” (ICO means “initial coin offering”, the cryptocurrency equivalent of an IPO, or initial public offering, for a stock).
Market participants are expecting immediate multiples of return on capital, regardless of the business case (if any). ICOs are viewed as near-guarantees of immediate big gains.
I see a lot of parallels here with the tech bubble of the late 1990s. And there will be some spectacular blow ups ahead.
But let’s be clear: at the peak of the dotcom bubble, the market cap of the NASDAQ index was nearly US$6 trillion. The entire cryptocurrency market cap right now is currently less than 1.5 percent of that.
The point is, for all the noise in the media, the level of general public participation in bitcoin and cryptocurrencies remains extremely low. Just think about your own group of friends and associates. How many of them even own bitcoin?
So this bitcoin bubble is just getting started.
Regulators at the gate
The legal and regulatory system is far behind what’s actually happening in the cryptocurrency space. How do you treat cryptocurrencies? Are they securities? Currencies? Assets? Something in between? Remember, all cryptocurrencies offer different characteristics. Some offer the equivalent of a coupon or a distribution of profits, for example.
This is probably one of the reasons why the attempts to set-up a bitcoin ETF didn’t work. I personally think bitcoin doesn’t need an ETF.
But at some stage regulators (most likely the Securities and Exchange Commission (SEC)) will step into this market. Especially as the financial stakes increase.
There are scam-like cryptocurrencies taking advantage of the huge boom. When investors start crying foul, you can expect the SEC to start weighing in. When they do, you can expect increased volatility and big drops in the scammier cryptocurrencies out there. But SEC participation will only make this industry more mainstream, and bring in more money.
In the meantime…
This was just a quick wrap-up of what’s going on in cryptocurrencies. I’ll be bringing you more insights on this space in the future.
But for now, everyone should be accumulating a little bitcoin. A few hundred dollars, a couple thousand… whatever you can afford to allocate in the super-speculative portion of your portfolio. Just look at China’s investors, who are crazy about bitcoin
Now, bitcoin will not keep increasing in value at its current rate of growth forever. At some stage the market price will correct.
But everyone needs to familiarise themselves with the process of buying, trading and storing cryptocurrencies. Blockchain and bitcoin will never replace gold, but they are here to stay. This technology will only grow in scale and opportunity. And being on the outside (and not understanding it) will limit your ability to profit from it.
Remember, this rollercoaster ride is just getting started. So there’s no reason not to be buying now.