2017 in review: A cryptobubble year or something new in the horizon?
As 2017 said goodbye, the focus of everybody moves to reviewing the previous year and setting targets for the new one. There is no dispute that for 2017 the focus of the financial trading industry was on cryptocurrencies, mostly on Bitcoin’s unstoppable bullish ride. With a 1400% increase in price (at least at the time of writing this article) that peaked above $20000 and its unprecedented volatility, Bitcoin has reached the headlines of any respectable financial outlet not only once. Therefore Bitcoin could not but just dominate my annual review as well.
A new subject in economics?
Bitcoin’s ride revived to economists the days of the dot com bubble, the property bubble and pursued some to study older ones as well, like the Tulip, South Sea and the 1929 stock bubbles. Famous economists as well as financial industry executives are convinced about an upcoming crash and the only questions for them are when will this happen and how high will it climb before the crash starts. On the other hand crypto-enthusiasts talk about a revolution and outline the numerous advantages of cryptocurrencies and how they will transform future societies, implying that there is no way back from what is happening right now. At the same time, our LinkedIn feeds are filled with opinionated bulls and bears engaging into flame wars in favor of the one or the other view.
In this debate, I will try to keep a more neutral and thoughtful approach. I strongly believe that with cryptocurrencies, we are in front of a new economic phenomenon for which we have very little understanding of and very few tools to study it. Probably we have no clue what is going on with Bitcoin and cryptocurrencies in general, neither we can predict with any degree of confidence what the future of Bitcoin and cryptos will be. I am afraid that in order to grasp what is going on with Bitcoin and cryptocurrencies, we will need to reinvent some parts of the science of economics.
Is Bitcoin a bubble?
To decide if Bitcoin is an asset bubble we first need to outline what are the main properties of an asset bubble. Asset bubbles usually share the following properties
- They are created on top of assets with intrinsic values.
- They are usually fueled by asset scarcity and short term speculation amongst other factors.
- Once a bubble bursts there is usually no recovery within a short and mid term timeframe.
The common path of a bubble is that assets with a certain and globally accepted intrinsic value e.g. commodities, houses, company stocks to name a few, see a circumstantial increase in their exchange price which is then multiplied by factors like scarcity, political coincidences, short term speculation and irrational decision making. Bubbles burst when scarcity is not an issue any more, the surrealism of the exchange price is comprehended by sellers and buyers and rationality starts to dominate the trades.
Now how does Bitcoin relate to the above? First of all, Bitcoin does not seem to have any intrinsic value. It does not have a commodity value i.e. you cannot eat a Bitcoin neither you can build tools or weapons from it. Neither it shares any properties of fiat currencies that reflect backing by a state and an entire economy. Bitcoin is just a useless token until the moment that somebody assigns to it and agrees with somebody else a perceptual value.
Also, scarcity in Bitcoin is internal and not external. While new Bitcoins are hard to be created and there is a maximum limit to the number of them, anybody can launch a new cryptocurrency and replace Bitcoin as a medium of exchange at any time. Therefore there is no actual scarcity in terms of physical limitations and properties e.g x amount of available gold or x amount available of houses. Anybody can launch a cryptocurrency. Therefore there is no need that only Bitcoin can satisfy.This is something equivalent to somebody being able to recreate a metal with the exact same properties of gold at any time and in infinite numbers.
Finally, it is not the first time Bitcoin went nuts. Bitcoin peaked again in 2013 before retracing for years and coming back to the proscenium again in 2017. So the 2013 drop that could be interpreted back then as a bubble bursting was nothing more than an exaggerated price fluctuation when compared to more traditional assets.
A conclusion from the above is that this time we have to deal with something radically new. Bitcoin is an asset with fundamentally different properties than other assets and this might result to fundamentally different behaviors. Hence trying to understand its behavior based on traditional models interpretation methods might lead to very wrong conclusions. For example, typical bubble burst patterns e.g. a 40-50% loss in value, might just be a volatile day for Bitcoin. What is a crash for a traditional asset is just a correction in price for a cryptocurrency. As a result, we are in front of a new financial phenomenon for which we will probably need to come up with new theories, terminologies and models.
Cryptocurrencies are here to stay
My humble opinion is that no matter what happens with Bitcoin, its price and its use, cryptocurrencies and digital currency technology in general are here to stay. They offer serious technological alternatives to various issues of the financial industry and society in general, like decentralization, transparency, smart contracts and many more. Therefore I am pretty sure that we will be discussing and debating about this subject for the years to come.
Within this context, you should expect that Spotware and cTrader will move in a direction that will place cryprocurrencies and the surrounding technology in the top priorities of our technology strategy and evolution in the following years, with 2018 being a year of exciting announcements.
Looking forward to blog more about this subject next year! Stay tuned!