What a year 2017 had been for cryptocurrencies, especially Bitcoin, which had recently hit the USD 20,000 mark in mid-December 2017 before crashing down to USD 11,000 and then bouncing back to hover around the USD 13,500 to USD 15,000 mark since start of the new year 2018.
As of today, the price of Bitcoin reached USD 11,381 due to regulatory pressure from China and South Korea and due to the comments made by Mike Bell of JP Morgan claiming that governments could ban cryptocurrencies.
Nevertheless, not a day goes by when one does not hear about cryptocurrencies in the mainstream media. Bitcoin sceptics think that it is a ponzi scheme and that the bubble is popping while supporters think it is the greatest innovation to happen in a really long time and the downfall is just another blip.
But, the recent introduction of Bitcoin futures at Chicago Mercantile Exchange and Cboe Global Markets Inc. has definitely made it easier for the hedge funds and other institutional capital to enter the markets and bet against the Bitcoin. Importantly, it has set a path for Bitcoin to break the chasm and to move towards the mainstream adoption.
Will 2018 see Bitcoin and other cryptocurrencies become part of normal retail investors' portfolios on a wide scale? Whether it would happen and if it happens, how quickly will it happen is anyone's guess.
Is Bitcoin going through the NetScape moment?
More than 20 years ago, Netscape, a Silicon Valley based company launched a web browser called Netscape Navigator and debuted its IPO (Initial Public Offering). The IPO was a success and made millions for the founders, and the web browser facilitated access to millions of people to experience the Internet for the first time.
Essentially, Netscape was primarily responsible for the Web to break the chasm and become part of mainstream adoption.
Consider this - In 1995 there were around 16 million internet users and a year later there were 36 million users. Today, it is estimated that there are 3 billion+ internet users in the world.
As more and more people interact with blockchains and cryptocurrencies, Bitcoin is being compared to the Netscape of 90's, signalling the evolution of a new industry.
When new technologies like blockchain and Bitcoin begin to emerge and show signs of early success either in terms of increased usage or the capital pumped in by the early investors, three things begin to happen in the market:
1. It draws greater number of new users (including merchants)
2. There is an increase in demand
3. Existing investors hold on to it anticipating further price increase
A combination of these three factors results in a price surge. Further, the fact that Bitcoin is limited in number adds to the price rise.
The newly increased market cap further attracts new investors, both retail and institutional, and the loop repeats itself. This is exactly what has been happening with cryptocurrencies, especially Bitcoin.
I cannot exactly narrow down one particular event that can be identified as Bitcoin's Netscape moment but I can point out a series of important triggers that have taken place in the year 2017 that are responsible for the explosive growth of Bitcoin as seen in the below image.
In addition to all the above events, one significant aspect that has contributed to the growth of Bitcoin and other cryptocurrencies has been the positive behavioural change in the adoption of these cryptocurrencies by merchants and companies. If you cannot walk into a supermarket and buy groceries with these digital currencies, they would be of no value.
Today, Microsoft, PayPal, Tesla, WordPress, Shopify, Virgin Galactic, Expedia, Whole Foods, Subway, PWC, EY, Bloomberg, and many more companies and merchants accept Bitcoin for payment, displaying the expanding nature of the currency.
If you look at all the blockbuster Silicon Valley companies with huge valuations, be it Apple, Microsoft, Google, Amazon, Facebook or any other company, they all had three elements that were responsible for their enormous success:
1. Lead by visionary founders.
2. Explosive growth.
3. A product with a potential to change the world.
With Bitcoin, despite the anonymity of Satoshi Nakamoto, all the three factors are definitely true. Which means that, with time, Bitcoin along with other cryptocurrencies could be adopted by a vast section of people across the world and could become part of our everyday lives.
The hype cycle
Like any other emerging technology, Bitcoin too has a hype cycle of its own, as seen in the below picture.
Bitcoin's hype cycle showcases people's behaviour during early stages when the hype and the mismatched expectations are at their highest level caused by market events.
In the first stage, Bitcoin is accumulated by early adopters and investors who understand the blockchain technology and the power of decentralized currency. At this stage, the popular media largely ignores it.
In the second stage, rising price draws the media attention and the price starts climbing further. The popular media reporting drives a lot of speculators into the Bitcoin market, further driving the price up.
Between the second stage and the third stage, you see lot of retail investors jumping the bandwagon and investing in Bitcoin because of rise in market cap, increased users, and the increasing media coverage. Bitcoin's price then goes into an overdrive. A lot of popular figures in business and finance start making statements - some calling it a bubble and some calling it the future.
In the third stage, Bitcoin reaches a peak and the selling pressure starts to kick in.
In the fourth stage, post the peak, Bitcoin crashes. During the downward spiral only the long term believers of Bitcoin and its technology continue to back it.
Lastly, the hype cycle resumes again, slowly taking off at a price that is slightly higher than what was at the initial stage of the hype cycle.
This virtuous cycle repeats itself although at a higher price and at an increased user base.
Is Bitcoin a bubble?
The current market cap (as of January 12, 2018) of all cryptocurrencies put together is close to USD 700 billion, of which Bitcoin's market cap alone is close to USD 280 billion.
Given the high market cap of Bitcoin, which is greater than the market cap of many large firms that have been in business for several decades now and given how fast Bitcoin has reached this mark, many people opine that Bitcoin is a bubble that is waiting to burst.
So, will Bitcoin and other cryptomarkets crash or continue to go through a correction in the future?
Most likely, yes.
But, does that mean Bitcoin is a bubble where it is rendered useless and everyone is going to lose their money?
I don't think so.
Simply because Bitcoin is a currency and not just an investment asset. You already have thousands of companies and merchants that accept Bitcoin. People are using it for conducting transactions, when buying and selling products, for the advantages it offers.
So, as the number of the companies and merchants accepting Bitcoin increases; the demand for Bitcoin will also increase proportionally.
Recently, the legendary investor Warren Buffet has said that "Bitcoin is a method of transmitting money. A cheque is a way of transmitting money, too. Are cheques worth a whole lot of money just because they can transmit money?"
I am an absolute novice in front of the legendary Mr. Buffet. But, the problem with this logic is that the cheque by itself doesn't have any intrinsic value of its own. Rather, the value lies in the authority that issues it - the bank. We can use a similar logic for fiat (paper) currency as well. The value of fiat currency is not in the paper itself but in the government/central reserve that issues this paper.
Similarly, the value of Bitcoin doesn't lie in the tokens used for exchanges but lies in the global network that allows this exchange to happen.
Coming back to the crash, it is most likely to happen in the future. But, the outcome of this crash would be the consolidation if only the true and established cryptocurrencies in the market, which are being used by the people.
There are so many cryptocurrencies in the market right now but only a handful is relevant. Most of the junk ones that have no use will get extinguished from the market.
Bitcoin will become stronger, more stable, and a reserve for digital currencies just like dollar is for other international fiat currencies.
Cryptocurrencies and blockchain are driving more investor and entrepreneurial interest
Traditionally, capital flows to places where the innovation is happening. If you look at the history of technology markets - during the 90's, capital was chasing internet companies like Google and Yahoo, then the capital moved to social companies like Facebook, Twitter, and Whatsapp, and then there were huge investments in sharing economy driven consumer companies like AirBnb, Uber, and Ola.
For some time now, there has been stagnation in software which had no real innovation to speak for. But now, you have a new wave of technologies like Artificial Intelligence, IOT, and blockchain where there is tremendous innovation happening, opening up new large scale markets.
Given the lack of other interesting technologies (and by extension interesting markets) to work in, a lot of entrepreneurial activity has shifted to these new technologies. With the increasing entrepreneurial activity, came the institutional capital that was sitting on sidelines for the cryptocurrency and blockchain market.
Now that this large institutional driven capital has started moving to this crypto space, inevitably there will be a large run up in valuation of currencies which is what is exactly happening now.
Like in stock markets, where huge liquidity entering the markets can drive up the prices of stocks multiple times irrespective of their fundamentals, in the crypto space the increasing investor interest is driving the prices up.
Besides, if a crash or a correction were to happen, you would see that time taken for the recovery from that crash or correction would also be fast.
Meaning, the volatility will continue to exist.
Are cryptocurrencies here are to stay?
What is fascinating about the world of blockchain and cryptocurrencies is that they are not geographically centralized in the Silicon Valley, which is a strong sign of decentralization leading to an enormous distribution advantage. No longer is the power concentrated with a few individuals or institutions - from govt to bankers to corporate to the rich.
The cryptocurrencies along with the blockchain technology that is driving it are disrupting the entire financial sector. These cryptocurrencies do not conform to the laws of conventional investment thesis that is often used to understand a traditional business.
I really have no idea how far Bitcoin and other cryptocurrencies can rise further or by how much they can correct lower. From a technology adoption cycle point of view, I still believe we are in the early adopters' stage of the cryptocurrencies usage.
But what is undeniable is that for people who genuinely understand this space of blockchain and cryptocurrencies and are part of it, there will be enormous wealth creation as you would have already noticed.
Importantly, in cryptocurrencies we have built something that bypasses the middlemen without the need for the trust and yet transfers the value. In the history of money, this factor alone could perhaps move us towards the next step in the evolution of money.
With time, nations may be forced to choose between regulating and taking part in this next step in evolution of money. I hope that we will choose the latter.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Business Today.
Pavan Kumar is a growth marketer who currently heads the product and content at a personal finance portal CashOverflow. He is an avid cryptocurrency enthusiast and is a passionate advocate of the blockchain ecosystem.