Measuring Market Bubbles: Comparing the Bitcoin Bubble to the Dot Com Bubble

Measuring Market Bubbles, Comparing the Bitcoin Bubble to the Dot Com Bubble
Measuring Market Bubbles, Comparing the Bitcoin Bubble to the Dot Com Bubble.

Measuring market bubbles is not an easy task. The very definition of a bubble is hard to pinpoint. The current bubble we are in is undoubtedly located in the Cryptocurrency/ICO market. Cryptocurrencies are powered by blockchain (with the exception of IOTA). No one doubts that blockchain technology is revolutionary, but it is important to distinguish between blockchain (which is a computer technology) and cryptocurrencies (which are digital assets). Many experts are predicting that blockchain technology will introduce massive growth into the world’s economy and will be the engine driving the vehicle that is the Internet of Things. The Internet of Things is simply widespread interconnection via the Internet of computing devices embedded in everyday objects, enabling them to send and receive data. Blockchain as a technology can help decentralize this widespread interconnection making it more autonomous and more efficient. Bitcoin on the other hand is a digital currency that utilizes blockchain as a technology to essentially create decentralized currency. Bitcoin has been very volatile ever since its creation in 2009, with massive price fluctuations as low as $0.50 U.S dollars per Bitcoin (BTC) and as high as $5000 USD/BTC. The biggest risk in trading Bitcoin is that at some point, vulnerable investors get caught in an event where liquidity in the market vanishes and big financial institutions don’t come to the rescue them. In any normal currency backed by a central bank, the supply of the currency is controlled as to maintain price stability. With Bitcoin, there is no central authority and if liquidity vanishes, then those who hold Bitcoin are left with nothing at all. Bitcoin is fiat, that is an undisputed fact, and if people lose confidence in the currency then the asset will simply be worthless. No one backs Bitcoin and if the market shifts against it, then there is nothing anyone could do to save it. Many people claim that Bitcoin is a threat to the U.S. dollar when the fact of the matter is the opposite. Bitcoin only poses a threat to smaller currencies and cannot match the larger currencies such as the dollar, the euro or the yen. Simple reason for that is liquidity. There is over 1.5 trillion U.S dollars in circulation, while only 16,602,587 Bitcoins exist in circulation… You do the math!

Now Bitcoin isn’t the only blockchain-based cryptocurrency on the market, others have been cultivated following the rise in popularity of decentralized currencies. Aside from Bitcoin you have Ripple, Ethereum, Bitcoin Cash (consequence of a network fork), Litecoin, Dash and NEM. Collectively, these digital currencies sum up to a market capitalization of just over $120 billion dollars. Bitcoin currently holds the largest market capitalization at 73 billion U.S. dollars, followed by Ethereum and Ripple. It is no secret that this market is in a massive bubble. If you won’t take our word for it, here is Mike Novogratz assuring us that the cryptocurrency market is in a bubble:

Now that we have established that the cryptocurrency market is in a bubble, we must establish just how big of a bubble it’s in. We accomplish this by comparing the cryptocurrency market to a similar market that has gone through the full lifecycle of a market bubble. Market bubbles complete their life cycle only when they pop, because in a way, the popping of a bubble defines it. The last bubble we can use as a comparison is the dot com bubble, as its in the same industry and many of the same companies involved in the dot com bubble are now involved with cryptocurrencies. Take Microsoft for example, they are spearheading multiple blockchain projects involving Ripple and Ethereum. IBM is utilizing blockchain technology to revolutionize banking, security, logistics, healthcare, insurance and much more! The fact that these dot com survivors are now pioneering the blockchain revolution makes the cryptocurrency bubble almost an extension of the dot com bubble. So let us gain more insight into the dot com bubble and how it popped back in March of the year 2000. If you want to gain more insight into the dot com bubble, then watch the video below. The video is the first of a series of 8 videos; if you enjoy the first one, you can find the remaining 7 videos here:

Now for the most important question of this paper, how big was the dot com bubble? The size of the dot com bubble at its peak reached 6% of all publicly traded companies and nearly 20% of all equities trading volume. To put that into perspective, the Cryptocurrencies/ICO market would need to reach 1.428 trillion USD to become a bubble the size of the tech bubble at its peak in the early months of the year 2000 [Source: US Stock Market Value at $23.8 trillion for 2015]. As reported by CoinMarketCap, the current size of the Cryptocurrencies/ICO market is $145.553 billion USD. This means that the current Cryptocurrencies market needs to get 10 times bigger to be on the same level and to be as big of a bubble as that of the dot com. Will it reach that? Well, we don’t know. All we know is that bubbles can get really big and if the Crypto Market is in a bubble, then it is in a very small one!

Amkhalil
About Alan Judi 340 Articles
Research Analyst / New York