Is there a bubble in the cryptocurrency market?

Is now the right time to buy Bitcoin or Ethereum? At our investment group Bona Fide we often talk about it, cryptocurrencies! But it’s not only us that talk about this new kind of digital money, large investment banks and financial media organizations make statements through online social media about it almost on a daily basis. In this article I will give an introduction to cryptocurrencies and talk about the big question whether there is a large bubble building up around these cryptocurrencies.

Did you hear about Bitcoin?

The name Bitcoin is one most people will say they recognize, but still most people can’t tell you more than that it’s some type of digital money and that it is worth a lot. So what actually is this Bitcoin? Bitcoin is the first cryptocurrency which actually broke through almost one year ago. But there have been developments lately which makes one wonder if this digital coin is worth so much after all. Also, some other digital currencies have come up in the meantime.

The first digital money talk actually came from the Netherlands in the 1980s. To do something about the wave of robberies done to petrol stations in the middle of the night, people invented a card which contained digital cash. After that, also Albert Heijn was talking to banks to give their customers the ease of paying directly from their bank account instead of first getting the physical cash from an ATM and using that in the shops. In the meantime there were projects such as Digicash and e-gold. However, they never really took off despite their promising potential. This was partly because the Feds in the USA didn’t like the new money, but a more prominent reason for this was that especially after 9/11 these kinds of money were thought to be made for terrorists and drug dealers. One might not realize this nowadays, but it could still be possible that these people are the main users of Bitcoin. In 2008, the https://bitcoin.org/bitcoin.pdf was posted online by someone who calls himself Satoshi Nakamoto. This Satoshi is unknown to this very day, and there are a lot of speculations about who this creator of the Bitcoin actually is.

What is most interesting about the Bitcoin technology is the so called blockchain. The blockchain can be the spark for a whole new range of solutions. Together with some other protocols such as ‘’Proof of Work’’ Bitcoin enabled itself a decentralized network to act as a currency as we know it today. The word decentralized means that there is no bank or government which can influence Bitcoin or its transactions. How the blockchain technology works in more detail is for a later conversation.

Since the year of 2008 Bitcoin became a well-known ‘brand’ which many investors know about. Despite the fact that a lot of people know about the Bitcoin, the coin itself is still not used a lot for its actual purpose: act as an alternative to the normal currencies. It is mostly traded to speculate on the potential future value, as is the case for the other cryptocurrencies too. The future will give us the answer to the question whether we will actually be able to pay all our goods with cryptocurrencies.

 

What other cryptocurrencies are there?

At the website https://coinmarketcap.com/ all the cryptocurrencies and their market size can be seen. The second largest cryptocurrency, after Bitcoin, is Ethereum.

Ethereum is in a lot of aspects different from Bitcoin. Firstly, the speed of transactions is higher for Ethereum compared to Bitcoin. Also, Ethereum enables so-called “smart contract” and makes it possible to create your own token. We could for instance create the ‘Bona Fide coin’ if we would like to. What must be noted though is that a lot of coins seen on coinmarketcap.com are only tokens on the Ethereum network. Mainly because of these smart contracts, there are a lot more possibilities with Ethereum, which means a lot more can be build. Apps and programs can for instance be programmed in combination with the Ethereum network to use for the transactions. In conclusion, the Ethereum network is a network which has more potential than the Bitcoin network.

 

Could cryptocurrencies be in a bubble which is about to pop?

I cannot deny that the cryptocurrency market as a whole is a bubble. This is mainly due to the reason that the value of a currency is totally determined by the demand for it. The demand for all the cryptocurrencies at the moment is, in my opinion, not because people want to use it to trade with each other, but only to speculate on its price. There is a lot of money to be made when any of these currencies become mainstream. So the main reason for people to trade Bitcoin or any other cryptocurrency is because they think it will be worth a lot more in the future.

I can imagine that the price explosion and the enormous amount of people who are still entering the market could be a bit frightening. Bitcoin, for example, was worth about 600 USD one year ago, while the price is above 4500 USD at this moment. Also, the ICO’s (Initial Coin Offerings) for most coins bring in way too much money. It’s not crazy to imagine anymore that an ICO brings in 100 million dollar when there is still only an idea, whereas a lot of startups struggle to get investments of 0,1 million.

Whether you believe if the cryptocurrency market is a bubble, depends on how you look at it. The euro as a currency can also be seen as a bubble, the worth of it depends on how much you trust it. And for cryptocurrencies this is exactly the same, the worth of it depends on how much people have trust in their future.

If you think the cryptocurrency market is too high and you don’t see a good future for these digital coins, you could talk of a bubble. But if you believe all people will be trading in Bitcoin in the future, the price is a steal at this moment!

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