TL;DR – It’s a textbook bubble, consult your financial advisor, only invest what you’re willing to lose, and no, I don’t know when the bubble will pop, nobody does – heck, it might have already happened.

Cryptocurrencies are rising at an exponential rate against traditional holdings like the dollar and the FTSE 100. The question everyone wants an answer to: can it last? What’s going on? Is it sustainable or will the bubble burst?

In the past week I’ve had countless emails from people asking me where they buy Ether/Bitcoin and if they should invest.  To those of us who have been in the Blockchain/DLT space for a while, I’m sure this is a familiar story.  If this is something you’re thinking about, or if you’re in financial services and your clients are asking you what they should do, then this blog post is for you (and hopefully quite cathartic for the Blockchain community!)

Bitcoin, the first official cryptocurrency, was launched in 2008 in Satoshi Nakamoto’s paper, Bitcoin: A Peer-to-Peer Electronic Cash System. It launched Bitcoin as the first internet and international currency, used in peer-to-peer translations without a centralised entity. People bought Bitcoin, saw the price rise, and felt like they were getting rich quick!  Then in 2014 disaster struck, an exchange (a place to buy Bitcoin) called MtGox was hacked, triggering a massive sell-off.  Bitcoin dropped from $1,300 to ~$250 over the space of a few weeks.  Bankers chuckled; a generation of nerds just got an MBA in economics the hard way.

Moving beyond Bitcoin

In the wake of the crash, the conversation changed to “it’s the technology not the currency” and we saw an explosion of alternative currencies (“alt coins”) and blockchain platforms that could be used for purposes beyond finance, most notably Ethereum, which was launched in 2015 after being ‘2 weeks away’ from launching in early 2014. Ethereum built on the the same blockchain ideas of Bitcoin – but with an audacious vision of becoming a world computer (don’t ask, just click here if you want to go down the rabbit hole).

At the same time, the large incumbent industries woke up to the idea of a less centralised technology solving their problems. Banks, who spend half of their time checking that their records match the other banks’ records, wondered if a shared ledger – or shared database – could save them money and make them more efficient.  Typified by initiatives such as the R3 Consortium and Hyperledger foundation, 2015 was the year the incumbents wanted their slice of the action.

With cryptocurrency prices at all-time lows and incumbents wading into the blockchain/DLT space, and sometimes even changing many of its core ideas all together, 2015 was to my mind was the trough of disillusionment for ‘public’ blockchain technologies.

Then, quietly, the Bitcoin price began to rise, and rise and rise.  In February of 2017 I remember tweeting “Don’t call it a comeback, but… Bitcoin is back and higher than it has ever been.”

Suddenly, towards the end of April 2017, all hell broke loose.  

Prices began to explode; Bitcoin was up, but Z-Cash, Ripple and especially Ethereum were up by massive percentages. Ethereum was up 2000% on the FTSE, and an individual bitcoin was valued at nearly $3000.  Indeed, the value of cryptocurrencies has risen so sharply in the last few months that the market cap for all cryptocurrencies passed $100bn in Q2 2017.

Not only has the value of cryptocurrencies risen, but also the profile of the currencies themselves around the world, so that traditional banks, financial institutions and governing bodies have begun to sit up and take note.

Why is the price rising?

In the coming parts we’ll cover why this is all happened/is happening:

  1. A concept often called ‘tokens’ or crypto assets that limits the supply of a cryptocurrency for use inside a new product or service (Covered in Part 2)
  2. Retail Investors and Institutional Investors arriving, and mainstream media now covering crypto assets on a day to day basis (Part 3)
  3. Convergence of ‘public’ and ‘private’ chains, typified by the Enterprise Ethereum Alliance and Z-Cash/JP Morgan initiatives (Part 4)

Context: Remember the dotcom boom?

Cryptocurrencies expert and COO of Z-Cash, Jack Gavigan, writes that he finds the rise of cryptocurrencies reminiscent of the dotcom boom of the late 90s. He describes the cryptocurrency sphere of development as “a new economic frontier – virgin territory”, which people are simultaneously keen to explore and invest in, and others are equally keen to condemn. Small, dynamic technology companies are better placed to react and interact within this sphere, unlike big incumbents which are averse to risk and are usually behind the first wave, still trying to figure out what this progress means and whether or not they should get involved.

Additionally, much like the dotcom boom, there will be winners and losers – notably Amazon, Google and eBay were the former, and Webvan and Boo.com the latter. Jack predicts that the technology and disruption to the current norm will prevail, regardless of any setbacks along the way, just as it did in the 90s.

Tulips and the Bitcoin bubble

Bitcoin bubble tulips   

It is easy for critics to write off the rise of cryptocurrencies to such heights in such a short amount of time as a bubble waiting to burst, with a price crash imminent. The favoured analogy is that of the sharp inflation of price of certain Dutch tulips in the 1630s. The price rose as demand increased until single tulips were several hundred times the price of bread or any other commodity of the age. Eventually the bubble burst and everyone who had bought tulips was clamouring to sell them off at a huge loss, and many people went bankrupt. There is a lot of commentary online that the same could happen for cryptocurrencies.  Indeed, in recent days it looks like the upward march may have halted.

However, crashes are relative. Bitcoin has already crashed once, when its price fell from $1200 to $173, but as we see it has more than recovered. A drop in price does not mean that it’s game over, as it was for the 17th century Dutch tulip industry. Cryptocurrencies have had major sources of investment poured into them and the blockchain industry as a whole, and the technology is evolving all the time to make the market more diverse, safe, and open to all. 

Social acceptance and communication

The future of crypto assets and tokens depends heavily on social, political and regulatory acceptance of them, and people’s perceptions are changing.  The narrative in Financial Services for some time has been “We love the technology but not the currency”. Back in 2013, people were unsure if Bitcoin was even legal and there was a lot of negative press around the sorts of nefarious transactions that could be made using Bitcoin and ledgers.

Fast forward to the present and all financial institutions, banks large and small, and even governing bodies now have blockchain research teams. Even the EU recently announced a pledge of €5million into blockchain research, surveillance and regulations – a big step forward into getting cryptocurrency and blockchain into the public consciousness and cementing it as the future.  This would have been unthinkable in 2013.

Jack Gavigan suggests that communication between experts, regulatory bodies and investors is the key to cryptocurrency’s future, to ensure an understanding of cryptocurrency is brought to a wider industry audience. This largely unregulated space needs open communication with regulators to ensure that when regulation happens it is fair and progressive, to allow for future development.

In a series of tweets he wrote: “It is incumbent upon all of us to help regulators (and law enforcement) understand this new technology and its implications….The adversarial attitude that some people in the crypto sector adopt towards regulators is entirely counter-productive…Good communication will lead to better understanding, which will result in sensible regulation, which will foster growth.”

What next?

The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.
– F. Scott Fitzgerald

Taking Fitzgerald’s words on board, we can hold the view that cryptocurrency’s rise is both a speculative bubble and quite possibly a revolution in how tech is funded – it can be neither, it can be both.

If I’m in a financial services company, I’d look at the public blockchain space again since that’s where much of the true innovation is happening.  The ‘private’ blockchain space will solve real problems for the financial services sector, but I can’t help thinking the answer isn’t a ‘public’ or a ‘private’ Blockchain/DLT – but ‘public and private’ that will produce the future of financial services. You cannot ignore the fact that there are at least 7,000 Ethereum developers who find the community organically.

Only time will tell.

The answer isn’t a ‘public’ or a ‘private’ blockchain/DLT but a ‘public and private’ blockchain/DLT that will produce the future of financial services

Next week: Tokens; what are they? What do they mean? And should I launch an ICO?

Want to learn more about all things cryptocurrency but can’t wait for the next blog? Check out the blockchain special on FinTech Insider!