According to the CIA Factbook, the total value of all the broad fiat currency in the world is close to $100 trillion, nearly the size of global GDP when you include dark markets. By contrast, the value of all cryptocurrency is about $150 billion. However, cryptocurrency today isn’t merely a digital store of value, it is the platform on which global, distributed, decentralized apps are being built, the future of the internet, or web 3.0. Even so, many naysayers and Luddites like to compare the crypto-boom with the dot-com internet bubble of 2000. They say crypto is a bubble, and it will soon crash to nothing…any day now.
They’ve said this for years, but crypto still continues to attract more and more developers, who build more and more functions and features, and the price rises higher and higher as a result, causing the naysayers to dig in with their predictions of doom and gloom, largely because they are jealous they missed out on early entry to one of the greatest investment opportunities in history and desperately want reality to match their original intuitions, that “No one will ever want to use crypto”, just like “No one will ever need a personal computer”.
During the height of the dot-com bubble, internet stocks were valued at over $3 trillion, and 2/3rds of that evaporated very suddenly. The survivors, however, went on to become some of the biggest most transformative companies in the world. Additionally, the market for internet stocks was entirely an American phenomenon at the time. Cryptocurrency isn’t even close to the overvaluation of the internet bubble, and it is a global phenomenon. Furthermore, we’ve gone through nearly two decades of inflation and growth since the internet bubble.
Call me when the price of 1 Bitcoin is $1 million, and then we can talk about bubbles.
But setting all this analysis aside, there’s one major difference I want to discuss to prove that crypto isn’t a bubble, and anyone who understands the concepts at play here should agree. In 2008/2009, central banks bailed out the global financial system with unprecedented action. The simplest analogy in layman’s terms would be that you were playing a game of Monopoly, a few people went bankrupt, but instead of declaring a winner or liquidating their properties, they just grabbed fat stacks of $500 bills from the bank – then they wrote “$500” on blank sheets of paper and added those to their accounts, too. These bailouts were largely what provoked the development of Bitcoin in the first place; the message on the genesis block, the first activation of the Bitcoin system, reads “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. Bitcoin was intended to be a system for storing and trading value that the bankers couldn’t manipulate to keep themselves and their buddies filthy rich after they made terrible mistakes.
Understanding the banking system is quite difficult, as it seems to run counter to all good reason – how most people think money should work. But you have to remember that once money decoupled from physical assets like gold, when money became this abstract kind of thing where the only value of pieces of paper is the faith you have that others will value it, then it sort of developed its own rationality. And the precepts behind it are the mandates laid on the central banks: keep unemployment low, and keep prices stable.
Tangent Warning: Right away we can see that if the central bank succeeds at its mandate, then practically everyone will work until they can collect social security, while business models that depend on volatile prices will be shut out of the market. Is this really what we want though? As more and more jobs become automated, there becomes less and less meaningful work for humans to do, but nevertheless pressure from central bank actions will force people with a lot of money to gamble it away creating jobs that society might not value, rote busy-work, but the alternative is watching the value of your money inflate away anyway, thanks to central bank policies. At the same time, prices may want to be low, because people who already have high debt can’t afford to buy homes priced at $500,000; but instead of devaluing to what the market can pay, central bank intervention props up the price by giving financial institutions the liquidity and leverage they need to keep those homes on the books at high valuations, even though they sit empty, unsold, vacant, rotting while many people are forced to rent overpriced apartments or move back in with their parents; home ownership drops to all-time lows, the stock of homes rots away, but thanks to central bank magic, the price of housing is higher than ever. The actual utility of the central bank’s mandates is questionable in 2017, but if instead of looking at the actual conditions experienced by real living people you look at an economy as just a big equation, numbers, then it all balances out just fine, and the people the central bank wants in power stay in power. Usually.
Under central bank authority, the idea of the economy is greater than the reality of the economy.
Back on topic. The central bank achieves its objectives primarily by manipulating the price of money. The price of fiat money is the interest rate paid when new money is created when banks issue loans. If a bank issues you a $100 loan at 5% interest, then that interest is the price you pay for that money. But the bank only created $100 in new money, not $105, so you have to find that extra $5 from somewhere else to repay the bank. In 2008, a lot of people had a hard time finding the extra money they needed to pay back their loans. So, many people defaulted, making it even harder for even more people to service their loans. Liquidity seized up, money stopped flowing, and to keep the economy running, the central banks intervened by setting interest rates to nearly 0%, thereby creating trillions of dollars in new money.
Since the price of money was zero, and people with access to it had to spend it or watch its value inflate away, people reinvested this new money back into stock markets, bonds, housing, and other high-dollar assets, eventually reinflating the price of these assets back to their all-time highs. But the real value of these assets didn’t return to the highs that they never were in the first place (those original high valuations were why the bubble popped and the financial sector collapsed, unable to sustain those overvaluations), fiat money just became worthless due to central bank policies.
The supply of money more than doubled in less than a decade. Now, with traditional investment-class assets back to all-time highs, there are still trillions of dollars of new money looking for things to buy. And some of that money has recently turned to cryptocurrency. This is actually great for the economy as a whole, because if that money had instead continued to inflate the housing/stock bubble, then we’d just put ourselves at risk of another massive collapse. Stocks are already massively overpriced relative to companies’ earnings, and if the prices go up any higher, then long-term investors will carry an unprecedented level of risk that their investments never pay off.
The value of cryptocurrency remains quite volatile because there remains a great deal of uncertainty over its future, and because lots of fiat pours in and out of it every day, and because there remains so little of it relative to fiat currency that it is still possible for bad actors to manipulate the market. But this manipulation only occurs when big investors spread bad rumors, then sell off some of their own holdings at all-time highs to start an avalanche of panic-selling before stepping back in to buy the dip and increase their own long-term holdings. Yet this manipulation is much different than what central banks do, because it depends on smaller investors believing the panic and actually taking action of their own will.
But when central banks manipulate the price of money and the value of assets, there’s nothing the average investor can do about it. The market is effected no matter what you do, you just have to change your behavior to fit the new policies implemented by the central bank. And you can’t vote the chairman out of power if you don’t like their policies. This is why so many people are moving so much money into cryptocurrencies, where they know that the valuation isn’t totally out of their control.
The problem is that people still like to think in terms of fiat dollars. They see the price of Bitcoin reach $5,000 and they think “Oh, this must be the top, it can’t go any higher than this.” So they sell off, expecting others to do the same. These barriers are merely psychological, and even though Bitcoin itself will likely never reach that mythical $1 million valuation, the long-term growth prospects for cryptocurrency in general are very high, because smart investors are tired of dealing with money that is totally out of their control. When you try to price cryptocurrencies in fiat dollars, you have to remember that fiat is practically worthless. The real value of all cryptocurrency should be, and eventually will be, greater than the value of all fiat in existence, more than $100 trillion. And that won’t be a “bubble”, it will simply be the new economic paradigm.
Look at all the institutions required to maintain a fiat economy. You need universities to train professionals. You need testing and licensing and regulatory bodies to certify professionals. You need enforcement institutions to investigate and punish offenders. You need lawyers and courts to determine guilt and settle claims. You need banks and accountants and financiers to set polices and manage accounts and create financial instruments. You need exchanges and traders to connect buyers and sellers and facilitate transactions. You need thousands and thousands of pages of laws and tax assistants and agents to keep these institutions funded. The cost of all these functions is trillions of dollars annually, and you have to trust that all the participants will be virtuous and not game the system to enrich themselves beyond the already astronomical salaries and benefits and bonuses they receive to compensate them for their expert knowledge.
But to maintain a crypto economy all you really need is smartphones and wifi. There are many societies all around the world that just do not have the resources needed to set up all the institutions required to run a fiat economy. And even in developed nations these institutions are filled with corruption. Cryptocurrency enables growth and stability in undeveloped nations with only relatively minor upgrades to their infrastructure, while eliminating many of the conditions for corruption in developed economies. Cryptocurrency is the future, and it will facilitate prosperity the likes of which the world has never before seen. All it will take to make this happen is for central banks and regulators to just let go, and for the masses of people to understand the benefits of this technology and adopt it in their daily lives.
This would never have been possible if banks hadn’t so drastically devalued their currency. But their intervention means that crypto can’t possibly be in a bubble, crypto can’t possible be overvalued – not in terms of fiat dollars. Because when banks can simply double the supply of dollars over a few years to keep themselves in power, then that money has no value other than to keep the banks in power. The more you use their money, the more firmly you establish their power over you.