Is crypto really like the dotcom bubble?
I have read a lot of articles comparing the recent ‘crypto-craze’ to the dotcom bubble in 2000.
Some seem to think that crypto is one big bubble set to burst, and it will eventually hurt those who have invested.
But is that really the case?
Of course, there are similarities, and naysayers will always look for the negatives – especially when it comes to something they don’t fully understand.
I read a post the other day on social media which proclaimed the “crypto revolution” is coming. I do not necessarily believe that is true either. I feel it will take two generations for cryptocurrencies to be accepted in ordinary life.
Yes, the pioneers of cryptocurrencies accept bitcoin already for everyday use. There are any number of Youtube videos extolling the virtue of buying a coffee or a pizza with bitcoin. But until at least 25% of transaction can be made using a cryptocurrency, I think it will remain something of a novelty.
Bitcoin has become the ‘Kleenex’ or ‘Band Aid’ of the cryptocurrency world, and that is a positive sign. Right now, the mining of coins is being questioned and becoming a negative influence – fuelled by those who see the cost of creating the coin as more than simply a financial transaction.
The incredible use of electricity required to mine Bitcoin will surely lead to a more environmentally friendly methodology.
Cryptocurrency as a funding source
So, where are the similarities between bitcoin and the dotcom bubble?
Well, moving from the “consumer” benefit of Bitcoin to the wider use of coin or token issuance as a funding source virtually free from regulation has a distinct similarity to dotcom.
Any business requires an amount of external funding, but this is especially true of start-ups.
And then there’s unicorns; unique new businesses and operations never done before. This enters a highly technical or specialist field that provides services to operations in a similar fashion to oilfield support or financial market security.
This is where the similarity to dotcom, and a note of caution should be understood. In the 1990’s, it seemed as though the only prerequisite for being a successful start-up was to have a website and to sell online. However, for every Amazon, there are at least ten thousand turkeys that vanished without trace. Being online or having a website was simply the means of communicating an underlying product and at best was a marketing or sales tool.
Cryptocurrencies are no more than a funding source when used in an ICO. The underlying business is the primary issue and it would be a success (or failure) whether funded in the traditional or token route.
That is the clear concern that observers cite as their main worry about the growth of this new paradigm.
The “Holy Trinity”
I see Blockchain, Bitcoin and token issuance as three major and separate parts of the new financial world.
Blockchain is of itself a major breakthrough that has enabled cryptocurrencies to exist. Its uses are phenomenal, and are only just being realized by the various industries to which it can be applicable. This is an area ripe for token issuance since it will only be invested in by those with a genuine interest and understanding of this new and exciting market.
Bitcoin is under threat. It is the shining light and beacon of the cryptocurrency world. However, transaction costs and timings are beginning to show the work that needs to be done to ensure it retains its preeminent position.
As far as simple transfer of value is concerned, it has already been overtaken by Ripple which is faster, cheaper and more efficient to use. Bitcoin, of course, has the benefit of a head start in user applications, relatively widespread acceptance and plain simple name recognition.
Token issuance will continue, but it will only take one massive “Ponzi scheme” type scandal to bring the whole edifice collapsing.
Such a token may already exist given the unregulated nature of the whole industry, but until it is out in the open “Madoff style” no one will be any the wiser.
The note of caution I sound above is the most valid response possible to any new coin or token issuance. What is being funded? Would the business pass muster as in the traditional market, is a bank could be found that would look beyond its own security requirements and provide an objective judgement unsullied by its own shareholder requirements.