The current cryptocurrency market is starting to look a lot like the dot-com bubble of 1997-2000, according to Chris Brycki, the founder and CEO of robo advice fund Stockspot.
“Bitcoin and the crypto currency market has already experienced several hype cycles where prices rocketed before falling 80% to 90% as the technology and adoption caught up with inflated expectations,” says Brycki.
“One happened in 2011 and then another two in 2013. We would be close to the end of another crypto hype cycle in early 2018.”
After peaking around US$830 billion in January 2018, the total cryptocurrency market has fallen 33% in three weeks and is worth $US560 billion. That’s up 3000% from a year earlier which means cryptocurrency “investors” are sitting on about $US500 billion of paper profits compared to a year ago.
“The cryptocurrency sector today has some striking similarities the dot-com bubble of 1997-2000,” says Brycki.
“People are pouring billions of dollars into ‘investments’ that have no revenue, profits or dividends, and those assets are rising in price only because others are also tipping money into them.
“As with the 2000 tech bubble, central banks are have implicitly supported this type of speculation by maintaining low interest rates. Near zero interest rates encourages risk taking behaviour since there is very little incentive to leave money sitting in the bank. The crypto boom is the latest variation of the same theme.”
Brycki has penned another blog as a next chapter on his initial advice about bitcoin.
In it, he asks: What could make the cryptocurrency market fall 80% from the peak like it did in 2011 and 2013?
“ICOs (Initial Coin Offerings) have been a hot topic in the (corporate regulator) ASIC Digital Advisory Committee meetings I’m a part of and I would guess it’s only a matter of time before regulatory constraints are formalised to supervise the industry around the world,” says Brycki.
China banned ICOs in September as part of a broader crackdown on cryptocurrencies. Regulators in Hong Kong and Singapore have also warned against ICOs, citing fraud concerns and money laundering risks.
“Rising global interest rates is another potential catalyst that may cause an unwind in speculative activity,” says Brycki.
“The reality is that it’s hard to predict what causes speculative activity to pop so anyone looking to invest in bitcoin or other cryptocurrencies should understand their investment could fall 80% to 90% at some point even if the longer term trend is up.
“Ultimately better regulation and another reality check for cryptocurrency speculators (in the form of a market bust) would be healthy for the industry as energy will be transferred out of speculative activity and into the building real, innovative technology once again.
“That’s when Stockspot will be interested in exploring blockchain as a potential user – and in cryptocurrency as an investment advisor to our clients.”