The Crypto Asset Bubble

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The crypto asset bubble is a great thing. Bitcoin and blockchain and Ethereum are going to change the world, and that is why they are worth a lot of money. But there is one problem, which is that they are not real assets. If they were real assets, it would be possible to predict how much they will be worth in the future.

There are two ways to make predictions about the future values of things: by making them, or by knowing how much other people have made from making them. The second way avoids the basic problem of predicting the value of any new thing: it assumes you can figure out what has gone before.

But really, you can’t do that at all. For one thing, if you could you wouldn’t need to predict: you could just buy the last five years’ worth of bitcoin and keep your fingers crossed.

The second problem is that there’s no way to find out how much other people have made from buying and holding bitcoin as an investment. To find out how much anyone else has made from an investment, you have to find out how much money they have invested in things like bitcoin and blockchain and Ethereum as an investment. And there’s no public record of how much anyone else invested in those things as an investment;

The crypto asset bubble, as I call it, is a bubble of the same kind that bubbles up in all asset markets. It’s an enormous market, with trillions of dollars pouring into it every year.

It’s bigger than the dotcom bubble or the housing bubble or any other recent bubble. But like those ones, it has all the signs of being unsustainable. In particular, it’s not clear how long a crypto asset will continue to appreciate in price. This is true of all bubbles.

These bubbles attract a lot of attention from people who are attracted to speculative investing, because speculative investing has become so easy and popular in this century that if you want to make money you need something new, something that hasn’t been tried before.

Crypto assets are very new. As I write this blog post, only four years have passed since Bitcoin launched out of nowhere at $0.003 per unit, and just one year since Ethereum started out at $0.0015 per unit. By comparison, it took more than ten years to get from the internet bubble of 1999 to today’s size of the crypto asset market; and most people who bought internet stocks then didn’t even realize they were buying stock until after they’d invested heavily in them.

It is likely

The boom in stocks and real estate is likely to end at some point, but that doesn’t mean that the crypto bubble will burst. On the contrary, the crypto bubble will keep growing as long as Bitcoin keeps being used as a speculative asset.

It might seem remarkable that we are still talking about crypto assets, considering how much they have lost. It is. At this point, “crypto assets” are no longer really an asset class — they’re just a small category of cryptos like “altcoins.” As a category, they are not yet worth talking about; no one really knows what they mean.

But the bubbles won’t go away until people stop buying them. When they stop buying them, the prices will drop. The price drops will be fast and large, but then they’ll stabilize and grow again over time.

The biggest problem in investing in crypto assets is that no one knows where to put their money. So far there haven’t been many choices for investors who want to put their money into something with more than just a small chance of making money for a few years. It’s very hard to get a good feel for whether any particular coin is going up or down right now; valuations don’t make sense because there’s so much uncertainty

The crypto market is a bubble. It’s not just the spectacular rise in price of Bitcoin and other cryptocurrencies. The entire asset class is full of irrational exuberance often stoked by Ponzi schemes disguised as ICOs (initial coin offerings) and by fake news pushing them as quick, easy ways to make money.

Crypto assets are not investment products. They’re speculative vehicles, like penny stocks, that have no relationship to any underlying value or practical purpose. The crypto markets are like gambling casinos with no house edge: you can win big or lose everything.

You know this. The price of Bitcoin has gone up tenfold since I bought in, and I have lost money. The run-up has been fueled by speculative bubbles, so it’s not surprising that the cryptocurrency bubble will end the same way.

Cryptocurrency is a term that means “hidden in text”, and the most popular cryptocurrencies are Bitcoin and Ether. Once you start looking into them, they don’t look like the sort of thing that would need to be hidden in text at all. As a result, there are two main categories of cryptocurrency: currencies and coins.

Currency is money. Coins are things that have value because they can be used as currencies. Bitcoin is a currency (because it can be exchanged for real money). Ethereum is a coin (because it works as a way of creating new currencies). Cryptocurrency is the term for all of this, which includes both currency and coins. That’s why your question about the difference between currency and coin sounds so strange: there isn’t any real difference.

The word cryptocurrency comes from cryptography, which means “writing in code”. Money also comes from cryptography: when we say we have money, what we mean is that someone who trusted us has given us some coins (which are like tokens), so we can exchange them for something else. The same thing happens with cryptocurrencies: people who trust you get coins from you; you convert them into something else; and they use those coins to make more bitcoins or ethers, which they exchange for other things

Sure, Bitcoin is a currency. But it’s also a medium of exchange, a unit of account, and a store of value. You can buy stuff with it—tickets to the Met in New York, or a Lamborghini. You can save your Bitcoins on an exchange like Coinbase and they’ll be there when you need them, like cash in the bank.

Bitcoin is as much a store of value as gold. It’s not just that people will want to hold it; it’s that they will want to hold more of it than they need for day-to-day needs. And if you’re not just going to save the Bitcoin for yourself, why would you put all your eggs in one basket?

I don’t think this is happening yet. Bitcoin may never become a true global currency; but I do think it has the potential to become something like gold was for most of history—a store of value, an alternative unit of account, and a medium of exchange.

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