An economic bubble is defined as trade in an asset at a price or price range that strongly exceeds the asset’s intrinsic value. This definition prompts the question: where does the intrinsic value of crytocurrencies like Bitcoin and Ripple lie?
Bitcoin’s value supposedly rests on it designed an efficient means to transfer money over the internet, being controlled by a public, decentralized network with a transparent ruleset. One could, if one wanted to, send money from Antwerp to Harare without going through a central bank in say, London or Hong Kong. For some, this breakaway of institutions is especially freeing.
Moreover, a defining feature of cryptocurrencies, and one of their most alluring, is that they are not issued by any central authority, granting them immunity to market manipulation, at least from financial institutions. However, certain cryptocurrencies have since strayed from this original idea and alignment with Bitcoin. XRP, for example, is 100% premined, with Ripple holding 60% of all its supply. With the majority of its tokens in concentrated hands, it functions less like a cryptocurrency, and more like a digital
Centralized vs. Decentralized
Yet Ripple is just one of a plethora of cryptocurrency spinoffs – the fact that Dogecoin, a fairly simple Bitcoin clone, and one that offers few technological innovations, and which originally started as a joke, had a market cap exceeding $2 billion, had set off numerous alarms within the crypto community. This inflated valuation suggests that the general public has poor underlying understanding of what blockchain technology entails, and views the speculative nature of its markets as merely a way to make quick buck. A notable exception to this, of course, is Ethereum. More than a cryptotoken, Ethereum is a platform and programming language on which further projects can be built and smart contracts executed. Still, most conversations happening in the media and between peers focus more on the investment potential than the technology itself, drawing attention away from the original purposes the distributed ledger was created for.
Vitalik Buterin, one of Ethereum’s founders, warned that:
*All* crypto communities, ethereum included, should heed these words of warning. Need to differentiate between getting hundreds of billions of dollars of digital paper wealth sloshing around and actually achieving something meaningful for society. https://t.co/aNpEnBNGsA
— Vitalik Buterin (@VitalikButerin) December 27, 2017
Furthermore, that this many people – from undergraduates to stay at home dads, are talking about buying in, suggests that the bubble is expanding, and its frothy. This fact, to those in the market, is hardly news. And based on how far the .com bubble expanded before it finally blew, the crypto bubble may be in for a while yet. But before you mindlessly buy cryptocurrencies, do yourself, and everyone else a favor, and
research, deeply and thoroughly, about what it is you are actually buying.
To echo the words of Warren Buffet: “I get into enough trouble with the things I think I know something about. Why in the world should I take a long or short position in something I don’t know about?” The old adage never held truer: knowledge is power. How else are you going to predict when the bubble blows?
Guest Post: This opinion piece was written by Daniel Zhao
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Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
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