Do we dare burst your crypto-bubble?

The recent cryptocurrency frenzy inevitably calls excesses of the late 1990s dot-com bubble to mind. New Investor’s Digest columnist Jordan Lazaruk questions whether or not the cryptocurrency phase is history repeating itself—or is it history in the making?

cryptocurrencyThe dot-com crash of the early 2000s serves as the ubiquitous cautionary tale of the tech-sector investment. Every trader knows the horror stories: Pets.com; Webvan; even Disney’s own Go.com plummeted to zero in what had been a highly speculative and generally overvalued market.

Enter the Bitcoin and cryptocurrency frenzy playing out today. Is history repeating itself? Ariel Investments CEO John Rogers Jr. said the buzz around cryptocurrency makes him “feel like we’re probably near the top of a bubble”. According to Nobel laureate Robert Shiller: “It seems like the dot-com bubble all over again . . ..”

The dot-com bubble

Although the dot-com bubble was rife with tales of overreach, collapse, and the dangers of ‘Get Big Fast’, it’s impossible to ignore the fact that shares of eBay Inc. (NASDAQ—EBAY), worth more than US$12 each in March 2000 and less than US$3.50 by that December, are now worth just under US$40. Or that Amazon.com Inc. (NASDAQ—AMZN), which traded at US$100 a share near the end of 1999 and below US$10 by early 2001, is now priced at just under $1,300 per share.

Back in 1999, at the height of the dot-com boom, no less an authority than US economist Milton Friedman predicted the development and use of cryptocurrency. In an interview with the National Taxpayers Union, he said: “I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash; a method whereby on the internet you can transfer funds from A to B.”

The ‘Crypto Bubble’

The ‘Crypto Bubble’ has investors unsure about our position on its timeline. Saxo Bank predicted in December that this year prices would rise, then plummet. Last week, one of their analysts gave an interview reversing the prediction, guessing prices will bottom out then skyrocket.

I’d suggest that the overall valuation of the cryptocurrency market is generous relative to the insignificant volume of usage (outside of speculative trading) of the actual technologies involved, leaving more room for the market to track downward than up. However, I cannot discount the very real possibility that sheer hype and the fear of being left behind will keep bullish momentum strong in the short term.

No matter what the conclusion, these discussions always end up circulating around one key player: Bitcoin.

The birth of a currency

Bitcoin was conceived on Oct. 31, 2008, when Satoshi Nakamoto sent an e-mail to members of a cryptography-related mailing list, known as the “Bitcoin P2P e-cash paper”. The e-mail laid out Mr. Nakamoto’s plans for “a new electronic cash system that’s fully peer-to-peer, with no trusted third party”. By January 2009, the first block was mined, and Bitcoin was born.

Since Bitcoin’s emergence, a few core companies have established themselves as legitimate competitors. Ethereum, launched in 2015, established a new set of parameters that expand the possible uses of blockchain technology. It is the platform of choice for new coins in development, and its token—ETH—boasts a market cap of more than US$100 billion.

IOTA, released in mid-2016, is the only significant competitor to operate without a blockchain. The network settles payments between individual users rather than in blocks, resulting in fast transactions that require no fees. The Iota Foundation has established strategic partnerships with Samsung Group, Volkswagen AG, Cisco Systems Inc. and several other leading technological firms. But no coin so far has managed to outperform the first-to-market advantage of Bitcoin. The cryptocurrency is also used in currency exchange traded funds.

Dismissive critics and staunch supporters

Bitcoin still occupies more than 30 per cent market share of the entire cryptocurrency market. It is the brand name of cryptocurrency. As such, it stands alongside the US dollar as the preferred trading pair for buying other cryptocurrencies. It has also been the main target of investor criticism.

Warren Buffett called Bitcoin “a mirage” in 2014. He doubled down last year, adding: “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.”

JPMorgan Chase CEO Jamie Dimon called Bitcoin “fraud” last September before beginning 2018 by declaring: “The blockchain is real.”

The critiques are reminiscent of former Microsoft chief Steve Ballmer’s 2014 analysis of current blue-chip stock, Amazon: “They make no money . . . in my world, you’re not a real business until you make some money.”

Amazon emerged from its niche as ‘the world’s largest bookstore’ to establish itself as the world’s largest online retailer thanks to a sound and thoroughly researched business plan built and executed by founder Jeff Bezos.   

Competitors attempted to break into the market with fashion, toys, garden supplies, groceries and even pet products. One by one they were absorbed or fell right off the map. Before that, it was a bargain stock that was largely ignored.

The online retail ecosystem proved itself intolerant of widespread competition; instead, it heavily favoured an early entrant, which fit Bezos’ approach perfectly.

Mr. Bezos believed that by establishing the Amazon brand, he could edge out competition on reputation. He said: “There’s nothing about our model that can’t be copied over time. But you know, McDonald’s got copied. And it still built a huge, multibillion-dollar company.

“A lot of it comes down to the brand name. Brand names are more important online than they are in the physical world.” Amazon has been an astounding success—emerging from the corners of the Internet it has become part of our everyday vernacular, leaving a stream of dead competitors in its wake.

The dot-com casualties of tech stocks

The casualties include Boo.com, which burned through US$188 million in six months, Pets.com, which in spite of its notoriety only existed publicly (from IPO to closure) for 268 days, and Kozmo.com, which promised to deliver “videos, games, DVDs, music, magazines, books, food, basics & more . . . in under an hour” and for free. Kozmo operated at a net loss of US$26.3 million in 1999 and was closed by early 2001.

Back in 2002, e-commerce analyst Matt Stamski famously summed up the situation: “You had five websites selling the same products, the same level of service and essentially the same name and it was difficult to tell them apart.”

The cryptocurrency alternatives

Today, there are nearly 1,500 alt-coins, or Bitcoin alternatives. Some, like Dogecoin (DOGE) or the Useless Ethereum Token (UET), have neither any purpose nor a clear intention to establish one. Others aim to represent equity or shares in a company, but the majority simply seek to accomplish transference of wealth, not much different from handing over cash or writing a cheque—or sending a Bitcoin.

For example, DopeCoin, MarijuanaCoin, CannabisCoin, HempCoin and PotCoin compete to be the currency of choice in marijuana transactions. Others with even more colourful names seek to become the preferred method of payment in the online adult entertainment marketplace. Very few demonstrate any significant differentiating principles or are turning a profit. But there are some.

Strong token competition but usefulness is slightly elusive

TRON and YOYOW are leveraging strong relationships with Chinese digital media platforms to build models using blockchain for the commoditization of individual users’ digital media contributions. Digital blockchain casino Edgeless officially came online last month when it launched its first blackjack table on January 19.

CryptoKitties.co, a platform for the display, breeding, and exchanging of blockchain-based digital cats, launched on November 29 last year. Cited as the first ‘crypto-collectible’ (think 21st-century Beanie Baby), CryptoKitty sales have already exceeded US$20 million. One company has gone so far as to create an entire digital world: Decentraland.

Decentraland recently parcelled out and auctioned off its digital ‘land’ in deals using its MANA token. The best parcel went for 600,000 MANA, or roughly US$87,000 at time of writing, and the overall land sale brought in over 161 million MANA, or US$23.5 million.

Another firm, the Ripio Credit Network, has already signed agreements to offer credit loans against the virtual land. Among the early development plans for Decentraland’s world is an exchange for crypto collectibles.

There are companies in the brave new world of cryptocurrency demonstrating legitimate potential. Although he was not discussing cryptocurrency at the time, Mr. Buffett himself has said: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Keeping that in mind, there is one constant in investing regardless of the market; to quote the Oracle of Omaha again: “Risk comes from not knowing what you are doing.”

The cryptocurrency market can be as dangerous a place to invest as any, and the best tool for navigating it is knowledge. Most importantly, Mr. Buffett tells us: “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

Jordan Lazaruk is a Cryptocurrency Consultant, co-founder of the food & lifestyle company Grindz, and a board member and proud supporter of Toronto-based non-profit group Project Phoenix.

This is an edited version of an article that was originally published for subscribers in the February 9, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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