When money grows faster than greed
New financial instruments are the creators of financial bubbles. No one really knows how they work and few can value them correctly. This was the case with collateralized debt instruments in the credit crunch of 2007, and it is now the case with Bitcoin and the block chain technology that powers it. The problem seem to be that people are behind the knowledge curve in the instrument and the power of greed is driving the market wild and will finally steer it into collapse.
Bitcoin and Bitcoincash
On the 1st of August we saw the “split” of Bitcoin. Or what they call in crypto world a “hard fork”. Creating a new crypto currency called Bitcoincash. This newly created digital currency instantly got a market cap of over $10 billion dollars with one mouse click. Every owner of old Bitcoins received the new crypto currency for free. The developers in the Bitcoincash community argued that it was needed to scale up the “block size” from 1 megabyte for Bitcoin to 8 megabytes for Bitcoincash. (Block sizes are bundles of transactions in a specific period of time.) The bigger block size can handle 24 transactions per second instead of 3. This scale up is meant to enable Bitcoincash to become more mainstream than its rival. In contrast VISA handles on average around 2,000 transactions per second.
Over 900 crypto currencies...
With currently 900 crypto currencies with a total market valuation of over 100 billion dollars, crypto currencies are growing as fast as greed can grow. But the people and companies creating these rely on real euros and dollars to pay employees, office space, and other expenses. The companies that create a new crypto will do this via an ICO (Initial Coin Offering) and raise the funds via a current crypto currency, receiving Bitcoin or Ethereum. So after their ICO they will need to sell to get the cash to pay their expenses, eventually cannibalizing their own currency. New “real money” needs to keep flowing in to keep the status quo. (Which starts to sound a lot like a pyramid scheme?)
How many people do you know that trade crypto’s, opposed to how many actually use block chain protocols. How many people do you know who talk and tweet about crypto currencies and their newest ICO’s, with every announcement a guaranteed increase in price. Have a look at all these companies and projects creating the crypto currencies, often low in staff with very little technological innovations. They all have one thing in common; raising tens of millions of dollars instantly.
Soar like a rocket, fall like a stone
Anyone who remembers the dotcom boom will recognize the pattern: soar like a rocket, fall like a stone. The current crypto hype sure seems like a bubble. A bubble on steroids fueled by greed, people see and hear of fortunes being made by others and will eventually jump in blind while the going is good.
Serious investing considers a price which is attractive relative to intrinsic value, speculation, on the other hand, occurs when people buy without any consideration of the underlying value or appropriateness of its price.