Many parallels are drawn between the current scenario of the cryptocurrency industry with that of the internet companies in the late 90s and early 2000s. Companies have raised more than $10 billion since 2015 through Initial Coin Offerings (ICOs).
Notable personalities, including Warren Buffett, Jamie Dimon, Bill Gates and Ray Dalio, have labeled the rise of cryptocurrencies as a bubble. The cryptocurrency industry has also been described as the most prominent bubble post the Tulipmania.
The Middle of a Cryptocurrency Bubble?
Bitcoin prices rallied from $963 on January 01, 2017 to hit $19,475 on December 17, 2017, translating to a price increase of 1,922 percent in less than 12 months. Ethereum and other cryptocurrencies also witnessed a massive surge in trading values. Investors started buying digital tokens as they did not want to miss out on being rich.
However, the dramatic rise in the price of these digital currencies also fuelled speculation that the entire industry may be in a bubble which is destined to burst eventually.
With the introduction of bitcoin, cryptocurrencies were promised to be genuinely global currencies, and a means to bank the unbanked. Price volatility, however, made it impossible for them to be used for daily commerce.
Technology startups then began the trend of hosting ICOs to raise capital. It didn’t take long for questions on the underlying value of this economy to be brought up too though.
Yoni Assia, CEO of eToro said:
“Ninety-five percent (of companies that raised money through ICOs) are going to end as nothing because that’s startup funding.”
Comparing the Internet and Digital Asset Era
The late 90s saw the rise of internet companies. These companies were flocked to by investors and venture capitalists that embellished them with more than required capital. Every venture capital firm did so on the assumption that these companies would become profitable at a later stage. Slowly by slowly, this ‘dot-com bubble’ kept growing.
A few years later, between 1997 and 2001, several of these internet companies went public. Their share price rose significantly and outpaced the annual returns of the Dow and S&P 500 indexes.
Cryptocurrency critics argue that the blockchain industry is also going through a similar period. The internet has been replaced by blockchain and an ICO is preferred over an IPO. American investor Warren Buffett famously criticized cryptocurrencies for not having any intrinsic value. Even shares of thriving online marketplace Amazon dropped like a stone once the dot-com bubble burst, going from $107 a share to just $7.
Salient Points of the Cryptocurrency Industry
While it is true that cryptocurrencies and blockchain technology are still in their early stages, there is plenty of room for newer companies to innovate and improve the existing dynamics of the industry. It is entirely likely that a few ICOs may be fraudulent and some developers may have raised capital for common uses. However, there is no denying the fact that blockchain technology as a whole will be around to revolutionize industries.
Going out of business because of a bad idea and losing in the market due to competition are also two different things. The percentage of companies that live through their startup days and achieve a certain level of success is quite small. Not all companies exploring blockchain may survive, but the ones that are still around after ten years have the potential to become Fortune 500 companies.
Examples of companies in the space that are massive successful include Binance and Coinbase. Binance has established itself as the market leader in the exchange business while a Coinbase executive famously said that he dreams of the company becoming the Google of the crypto industry.
The companies that managed to come out of the dot-com bubble went on to become global giants. Amazon, Paypal, Google, and eBay are only some examples that were formed before the start of the bubble and yet, are now the largest technology companies.