We all have friends that think that Bitcoin and the other cryptocurrencies are just a bubble that's going to pop sometime very soon. I personally seem to have the "it's not a bubble" conversation quite often. There are a number of relatively simple arguments that you can use to address the "bubble" concern, so here goes:
Parameters to identify any bubble
A la Greg Mannarino, there are two parameters that dictate a bubble and both need to exist at the same time. If both parameters are not in place simultaneously, it's not a bubble:
1) It must be an asset that is widely held. Far, far less than 1% of the world populations owns Bitcoin or any other cryptocurrency. At a total market cap of around $100 billion, it's still a very small market relative to markets like the global real estate market whose size world wide is around $250 trillion or the global bond market which is over $100 trillion.
2) The asset must move above the ability for the average person to afford it. Since cryptocurrencies can all be broken down so as to be able to buy very small units of them, they are always affordable for anyone
In other words, it's completely ridiculous to call cryptocurrencies a bubble at this point because almost no one owns them relative to other asset classes. There certainly are some non-justified prices in various cryptocurrencies due to speculation on them, but these will correct in some major upcoming volatility waves in the cryptocurrency market. However, the market itself will just keep growing and so will the major cryptocurrencies.
Buying Bitcoin is like buying a fund of NASDAQ stocks for a whole new marketplace of crypto start ups
What most people still misunderstand is what cryptocurrencies really are. You need to explain to them that they are buying speciality coins for purchasing various services. Let's take a hypothetical example. You go to the car wash and buy a few car wash tokens for washing your car. If the car wash is ultra popular and there aren't many tokens, they go up in value because everybody wants to get in and wash their car too. They become willing to pay a premium just to get a token to wash their car. Eventually people start to speculate on these tokens as well because they are getting so popular and there are so few. Hell, even the car wash is in on the game and owns a bunch of backroom tokens waiting for the right moment to sell them to make more money for themselves off of the speculation. In this way, the token scarcity is even planned in at the beginning as part of the mechanism for funding the car wash. The tokens actually become like stocks in the car wash except that you don't own the car wash company but rather you own rights to their services. So you can explain to your confused friends and family that cryptocurrencies have become like a cross between a service-specifc currency and a company stock.
Now, since almost all cryptocurrencies need to be purchased on exchanges using Bitcoin, Bitcoin invariably becomes part of what I've called the "petro-Bitcoin" model (see my previous article on this here). Of course then Bitcoin will alway rise roughly on par with the expansion of the cryptocurrency market that it represents. Basically, as long as money is still flowing into the cryptocurrency market, Bitcoin has to go up.
In fact, there are other cryptocurrencies that have their own ecosystems just like Bitcoin, and these will also keep going up as their ecosystems expand. Bitcoin's ecosystem is the whole cryptocurrency market whereas Ethereum's ecosystem consists of all the cryptocurrencies that are built on top of Ethereum, so as these grow so does Ethereum. See my previous article on crypto-ecosystems for more on this.
But maybe it's just like the previous tech bubble or even the historic Tulip bubble
The previous tech bubble had a hell of a lot of speculation in it just like the cryptocurrency explosion now, and yes it dropped massively at certain points, but a lot of these companies still exist and make a lot of money. In addition, these tech stocks were never used by the broader populace as a currency. This is a whole new way of looking at the asset backing of a currency. Our current fiat money has absolutely nothing backing it except debt. In other words, fiat money is a liability, but at least cryptocurrencies are backed by new tech services that have a real value.
Let's also talk Tulip Bubble while we're at it. The Tulip Bubble in the Netherlands is almost always described as having lasted from 1636-1637, and in similarity to current times, tulips were also traded like money.. incredibly valuable money. The actual Tulip Bubble ran far, far longer though. Tulips were introduced into Holland from Constantinople in 1593 and started their upward trajectory from here. So the Tulipmania that gripped the Netherlands actually started in 1593 and crashed big in 1637. That's 44 years from the start of the tulip market until the crash. So even if cryptocurrencies market may become a bubble just like the Tulip Bubble, we are only 8 years into the market since the introduction of Bitcoin in 2009. So basically it's going to take a hell of a lot more time and investment in cryptocurrencies before their run is anywhere near done.
What's not a bubble today?
Every significant asset class today is in a bubble with the exception of cryptocurrencies and precious metals. For cryptocurrencies it's because they are so new and are just beginning their move upwards. It's also because most cryptocurrencies are deflationary. This means that instead of more and more being created like fiat money over time, they have a very limited supply that can't get any bigger. So as you hold them over time with demand for them increasing, they will simply go up in value without stop. (This is of course only if you buy cryptocurrencies that are both deflationary in their models and have long lasting demand.)
For precious metals, they are mostly deflationary but you can mine more albeit at a very slow pace and with a lot of effort. So metals demand will also over time outstrip supply and their price too will go up. What makes precious metals even more valuable is they have been suppressed with paper market manipulation for decades in order to keep the masses believing that the ever inflating debt-based fiat currencies still have value. The monetary metals are literally subsidized through global metals cartel manipulation.
Since both of these asset classes are ultimately deflationary and we are now about to enter into a massive global inflationary environment based upon the collapse of all the other asset bubbles around us, you really can't lose with either cryptos or monetary metals. What you are ultimately looking to invest in are assets that are: 1) highly undervalued, 2) ultimately deflationary, and 3) have huge potential ongoing demand. When all of these three properties are there, throw as much money as you can at these assets because they are the complete opposite of bubbles. They will be the real money when the unravelling begins, and they will be sitting as the kings of currency on top the pile of all the other dead assets when they have all been re-priced to fair market value.
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I like your write up. A bubble can go on for a very long time and only dries up when there is no more fuel (usually: no more new buyers). We're not even at 0.1% of the potential reach, is my guess, so there is ample room to grow and develop the next few years.
Some posts from me that also touch growth potential and bubble talk:
https://steemit.com/bitcoin/@wekkel/why-i-do-not-worry-about-the-bitcoin-scaling-debate-anymore
https://steemit.com/bitcoin/@wekkel/bitcoin-in-a-bubble-no-way
Nice post. The bubble convos are getting exhausting! But the cryptocurrency world is so exciting to most- it prompts the "too good to be true" crowd to come out in droves
Up-voted and re-steemed! A good write up on the current situation of cryptos, and also easy to read with great editing.
I realize that much of the content I come across online, is developed by people that may not have english as their first language and that is perfectly fine. I do find it refreshing however, when an article is well written with proper grammar throughout. Thanks for putting in the time to write it.
Thanks for posting. I have been thinking a lot about point 1. How can we have a bubble, when so very few people are even aware of a currency like bitcoin? However, couldn't a small community (crypto investors), still create their own bubble in a small market cap asset (bitcoin)? Were tulips widely held outside the Netherlands?