Many People Are Very Worried About The Crypto Crash
Over the last few months, we have seen the price of Bitcoin and many other types of crypto crash. As of the time of writing, Bitcoin has fallen to around $7,000 – a long way from the all-time high of almost $20,000 at the start 2018. The other major cryptos are similarly down.
Never mind that Bitcoin is still massively higher than where it was at the start of 2017 (c. $960). The most recent pullback has caused some people to declare “the end of crypto” – not for the first time, and not for the last.
Anyone who went and dumped significant cash into crypto at the beginning of the year will be underwater right now due to the crypto crash (when measured in fiat money terms). It’s therefore understandable that people may be feeling a bit disillusioned with how things have played out. And the media have, of course, been quick to stick the boot into the cryptocurrency bubble.
We’ve Seen This Story Before
But we need to put this most recent crypto crash into its proper historical context. We don’t need to go back very far to remember something very similar – the dot-com boom and subsequent crash.
In the late 1990’s, seemingly any company with the word “Internet” in it became valued at an eye-popping sum, regardless whether it had ever made a profit, or indeed could point to any sort of credible business model at all.
It didn’t last. The dot-com bubble imploded with an almighty *pop*. For all those questionable businesses, the party was over. The press ran stories which decried the greed and hubris. They gleefully celebrated the collapse of the a house of cards.
But here’s the thing – the Internet is still here. The fall in the share price of Internet companies meant very little about the underlying technology. In fact, the Internet is more influential over our lives today than it has ever been.
Those same journalists who reported on the dot-com crash found their entire industry transformed by the Internet, in relatively short order.
The dot-com crash did something else: it got rid of a lot of weak players. The ones that survived the downturn were the likes of Amazon and Google, and we all know how influential they have grown. Perhaps the crypto crash will cause a similar survivorship bias, and knock out a few of the dubious initial coin offering projects doing the rounds.
The Price vs. The Technology
Here’s a fun historical fact for you. The NASDAQ (a stock-market index heavily weighted towards information technology companies) reached a high of 5,132 on the 5th of March 2000. After the dot-com crash, the index value fell off a cliff – and never again recovered to those heights, until 2015. That’s right – it took 15 years for the price of technology companies to recover their way to the level they were already at in 2000.
Those 15 years saw great leaps in the Internet. Innovations which had widely taken hold by 2015 (but not in 2000) include:
- Social media
- Remote working
- Internet-powered smartphones
- A huge rise in e-commerce and digital distribution, causing the collapse of huge brick-and-mortar incumbents such as Borders bookstores and Blockbuster video rentals.
We surely don’t need much more proof that the price can easily get out of whack from the progress of the underlying technology. The same is true of the most recent crypto crash. While it’s easy to fixate on the price, it is an oversimplification. It is necessary to dig deeper to really understand what is going on.
What To Focus On Instead
When investing in cryptocurrency (or any asset for that matter), it must be remembered that the price needs to be understood as a combination of “intrinsic value” and “speculative value”. What’s the difference?
Intrinsic value refers to the “true” value, based on the number of users, community size, scarcity of the asset, and the usefulness it the technology has.
Speculative value is the value that speculators have assigned to it, in the hope of securing an even higher in the price.
A key Bitcoin criticism (and indeed, this applies to just about all the others too) is that determining the intrinsic value is very difficulty. But this is the task we face. Berniske & Tatar proposed a coherent framework in Cryptoassets, and is most certainly worth a read by anyone who wants to try and avoid being exposed to a crypto crash.