With the year 2017 drawing to a close and seemingly the entire world going mad about blockchains, it is time to revisit two of my earlier articles.
The Cryptobubbleâ€Š–â€Šyes we are in a bubble and it will burst
Firstly, I would like to share a few additional observations regarding the current bubble in crypto assets, which are largely additional to my earlier article from November.
Since I wrote that article, a number of things have happened that further substantiate that cryptoassets are in a massive bubble.
Missing quality discrimination between crypto assets
In most bubbles, people caught by the mania fail to discriminate between the different assets that they can invest in. During the .com bubble this manifested itself in anything related to the internet soaring and companies like etoys.com or letsbuyit.com commanding hefty valuations only to later succumb to their fates. There is currently a very strong move going on in the cryptosphere which mirrors this bubble characteristic.
Let’s look at the current Top 10 Crypto “Coins” in market cap by total supply (ie not just circulating supply, which is a misrepresentation that is prevalent in the entire space, see my previous articles on the topic). I am not a coder at all, but even the simplest of technical minds will be able to grasp the following example.
The big surprise is that the highest market cap coin in the world is actually not bitcoin, but Ripple at this point in time. In short, Ripple aims to take the blockchain technology to large financial institutions in a scalable way in order to compete with and possibly replace SWIFT. Lofty goals for sure and the number and names of banks said to be clients of Ripple certainly lend some sort of credibility to the firm. However, it is important to note a few points regarding Ripple’s valuation.
The public blockchain of Ripple is currently valued at over $200bn or more than Goldman Sachs, Pfizer or General Electric (let that sink in for a second). This public blockchain currently has zero use for anyone. It is a centralized ledger and thereby unattractive to anyone believing in the crypto value proposition of decentralized, trustless transactions. It is in effect simply another centralized system not that different from SWIFT in many ways. The company behind Ripple owns c. 62% of the total Ripple supply directly (escrow not withstanding) and there are no decentralized miners. Other people far more qualified than myself have written about the reason for decentralization, but suffice it to say, this key difference makes it impossible for Ripple to be valuable the way bitcoin is.
Fair enough you might say, given Ripple has reportedly gained well-known financial institutions as clients, there is no need for Ripple to be decentralized in order for it to have enourmous value that might easily outshine bitcoin if the banking industry were to start using it as an alternative to SWIFT. Banks certainly won’t mind centralization. While that is true, note that this has nothing whatsoever to do with the Ripple coins that you can buy on crypto exchanges and that constitute the market cap that currently ranks number one in the world above bitcoin. None of the banks will use the public blockchain as their means to transfer money. When they become clients of the company behind Ripple, they are asking them to build (or rather to explore building) a PRIVATE, in-house blockchain based on Ripple technology. To avoid any doubt, that blockchain, just like SWIFT will be internal to the banks and there will not be any transactions taking place from banks using the public Ripple blockchain. Yes, that might (this is a very small chance in my view) at some point still happen for some smaller banks, but it is not the likely use case and certainly not what is happening currently. Therefore at this point, “dumb money” mostly at home on Coinbase and some of the other “entry-level” exchanges is currently attributing a valuation of $200bn+ to something that is quite literally hot air. None of this is to say that the team behind Ripple might not one day build a replacement for SWIFT, but let it sink in again that this has no relation whatsoever to the coin people are trading now. It is not equity in the Ripple company, it is a share in a useless network.
A final thought on Ripple for everyone who claims the protocol still has a value for people not minding the centralization who want fast and cheap transactions. To those people I say: use raiblocksâ€Š–â€Šit is decentralized, lightning fast and most importantly free. There are no transaction fees. This value proposition is unlikely ever to be bettered by a for-profit organization’s centralized public blockchain. Should that public blockchain (againâ€Š–â€Šnot the company’s equity) really be worth more than Pfizer?! Let me throw in that Uber’s latest investment round was valuing the company at just under $50bn. A fourth of the value of Ripple’s useless coins.
Other coins with similar issues where the companies behind these coins might easily have an attractive product to offer to corporate clients, but suffering of very much the same issues as Ripple or where the entire coin very much looks like a scam that we can currently find in the Top 10 (!) of Crypto market cap are IOTA, Bitcoin Cash, ATMcoin and potentially Solarcoin. I have not done enough digging on the latter two, so they might be wrongly added to the list, but you can do your own research. Even just looking at the “normal” Circulating supply market cap (basically the start page of coinmarketcap.com), you have several of these centralized, useless public chains as well as scams listed with $0.5bn+ valuations. To name a few, we can find Ripple, IOTA, Bitcoin Cash, Bitcoin Gold, Bitconnect, Tether, Veritasaeum and Digibyte all in the Top 50.
The fact that the market currently does not seem to distinguish between strong projects with coins that will actually have a use case and potentially a value to investors like Syscoin, Raiblocks, Monero, bitcoin or Lisk and the aforementioned scams or useless “hot air” token in terms of valuation shows only one thing: a lot of “dumb money” that buys anything blockchain related and hyped by potentially malignant actors with a hidden agenda (nota bene: this refers to pump and dump schemes, never to the people behind the projects) has recently entered the crypto markets. That is very often the final stage of a bubble and I do not believe that “this time is different”.
Crypto valuation levels are now getting relatively close to .com levels
I pasted the above two articles here as I try to use some small-town analytics in the first one to compare the .com bubble in size to the current crypto bubble and the second article is an excellent paper by John Pfeffer that clearly makes the case for the long term value of bitcoin and other crytpo assets coming to the same conclusion as myself (namely, bitcoin might be a rational addition to an investor’s portfolio, but current valuation levels do not support any other crypto asset to be added).
In the first article I conclude that the .com bubble was worth approximately $4trn, but that about 90% of that was institutional money. The share that is comparable to crypto is probably much smaller as the institutional side to crypto investing will need much clearer regulations and asset custody security to really take off. I am of the opinion this will happen only after the current, private individual-driven bubble bursts.
At this point in time, the combined total supply market cap (ie not the circulating supply, but the supply that includes the founders/team’s allocation of token, which is only sensible, please see an earlier aricle here) of all crypto assets has surpassed $1trn. That is one trillion US Dollars for “assets” that offer a share in network dynamics but no ownership in the underlying blockchains or development teams at all. I am not saying many of these projects won’t disrupt the economy, much like the internet did, but they currently certainly are not (much like internet stocks did not yet in 1999/2000).
That means the current bubble in crypto of $1trn compares to approximately $400bn fueled by private individuals in the .com bubble. As I say in my earlier article, of course the crypto assets are valuable so not all of this is bubble, but by now it is relatively safe to assume that the part of crypto valuations driven by bubble-mania has reached at least the level of the .com bubble in terms of private individuals’ involvement. I encourage everyone to read John’s excellent paper I linked above on the valuation aspect.
The Coinbase issue
What I describe as the Coinbase issue is a bit special to crypto. The management of digital assets is much more difficult at this stage for the individual user than it is to buy some stocks or even an ETF. There are things like wallets, cold storage, multiple different exchanges and transaction fee settings to worry about, aside from maneuvering the scams like VERI, John McAfee’s coin shills or BCASH.
Therefore, people caught in the mania typically buy whatever is easy for them to manage. This means that any coin (rumored to be) added to Coinbase, which is the world’s most likely entry point exchange for most people starting off now, goes parabolic in price for no apparent reason. Ripple is an example of this, while BCash and Litecoin are others.
This extends to public, established markets, where the Bitcoin Trust trades at a 20% to 150% premium to its underlying coin holdings (ie people are paying double the price to gain exposure to bitcoin via an easily tradable security than what they would have to pay if they simply bought bitcoin directly).
Overall, the typical Coinbase user, in my opinion rarely invests in established assets like stocks, bonds and ETFs and might very well be making his or her first experiences with gaining money and losing money on Coinbase trading crypto. I remember well how agonizing and thrilling those times were for me. Currently however, this fraction of the market is dominating the moves of assets and no regulations are in place to prevent malicious behaviour (if crypto is not defined as an asset class like equities etc then insider trading and wash trading are actually not illegal and the market is currently aflush with these activities), so the results are sometimes downright scary. It does not help that mainstream financial media like CNBC, at times, look very much like beginners in the space as well.
All of the above make me yet more certain that the current mania will not last and that we will see a massive correction before the cryptomarkets, much akin to Amazon, Ebay, Google or Facebook will truly take off after the wash out is over. It is, by the way, not a valid counter point to say that crypto has been called a bubble many times over and always came back stronger. There is no reason whatsoever the same asset (bitcoin for example) should not experience multiple bubbles after which it falls 80—90% and then recovers. So yes, I believe the earlier bitcoin bubbles where indeed also bubbles, but on a smaller (much smaller) scale. But that is debatable.
The all important bitcoin priceâ€Š–â€Šwhere are we going now?
I feel like this post would not be complete without updating my previous post on bitcoin price prediction below.
In the article above I specifically said that bitcoin was ending (in my opinion) the end of its current, years-long bull cycle and that a strong wave 5 (Elliot waves) was in process at the time. I went on to say that this wave was likely to take bitcoin above $15,000 and would be followed by a strong correction that should show the complete A-B-C pattern typical for Elliot Wave corrections. Bitcoin went a bit further up than predicted but sure enough started its correction. I have posted two updated charts below.
The medium term chart is the more relevant in my view and shows two negative developments. Firstly, wave A (itself made up of a-b-c moves) is clearly in process and therefore a correction has begun. What is more worrying is that a Shoulder-Head-Shoulder (S-H-S) formation indicated by the red line has also been triggered with bitcoin falling below $13,500 (if it closes there today). The reasonable target for both wave A as well as the S-H-S is somewhere around $8,000 per bitcoin. Given this would also represent a c 60% correction from the highs, it should serve the market well in sweeping out all the “weak hands” that recently joined crypto and are buying indiscriminately across the board. Afterwards, a recovery to B should follow and a final sell off should test $6,000 to $8,000 levels again. I personally at the very least expect bitcoin to test the $10,000 level soon. With a lot of luck or tether printing it could turn around then and leave all my lower targets untouched.
As always, I cannot be even remotely sure this is actually how it plays out, but I find it not too unlikely that this sequence of events is triggered by weak hands exiting (move to A), a few insitutions cautiously buying (move to B) and then government regulation causing another move down (to C). Also as always, given Tether can just conceive new US Dollars out of thin air at this point and push bitcoin price higher on its own, it is just as likely we take off to a new all time high from here, given we are still at the early stages of a very manipulative market.
I fully expect the next wave of crypto assets to start making a mark in their respective industries after this correction and institutions to drive prices much higher than the current levels. I also want to re-iterate that I am generally positive on bitcoin and the cryptosphere, but at this point in time I would tread carefully.
As always, a short but important disclaimer: none of what I write here is to be construed as advice to buy or sell any kind of asset. It is merely my personal and not my professional opinion. Any asset can go to zero. I also want to add that any negative opinions expressed about the blockchains of brilliant development teams are just thatâ€Š–â€Šopinions. They do not mean that I don’t have the utmost respect for the teams behind any of them, including Ripple, IOTA and Coinbase. I do.