Recently, famed investor and Berkshire Capital CEO Warren Buffett opined during an interview on CNBC that, the recent success in cryptocurrencies will “almost certainly” come to a “bad ending”, although he did then concede that he did not know when or how said bad ending would occur. The comment obviously received a lot of attention, with crypto detractors feeling vindicated by finding themselves to be in line with the world’s most successful investor, and crypto’s advocates, for the most part, writing Warren Buffett off as just another traditional investor who does not understand crypto-currencies. No matter what side you fall on however, Buffet’s admission that he doesn’t know what the “bad ending” he foresees will actually look like, is indicative of a major hole in many of the arguments made by those currently crying bubble, namely the question of, how does it burst? Any investor will obviously be laughed at to some degree for putting forward the infamous argument of “its different this time”, but in terms of the historical examples of bubbles put forth by crypto’s detractors, Bitcoin and moreover the larger Cryptocurrency ecosystem, is simply an entirely different structure than the markets involved in said examples.
Firstly, the argument that bitcoin and other major cryptocurrencies are similar to tulips or beanie babies or other novelty crazes simply isn’t true. It becomes almost laughable when one realizes that many of the individuals screaming tulip-mania, will in their next breath praise blockchain, or the “underlying technology” of cryptocurrencies. These two statements are entirely contradictory, if the underlying technology is valuable, that is something automatically more valuable than a Tulip. There was no more underlying use or value (let alone technology) to Tulips in the 1600’s during Tulip mania, than there is today. It is therefore, difficult to make comparisons to crazes such as Tulip mania, without discounting the value of blockchain technology as a whole, which many of even the biggest Bitcoin skeptics do not seem willing to do. As such these arguments can be put aside almost entirely.
There are more valid, cogent, arguments/concerns regarding the crypto space’s state as a bubble. The Dotcom bubble seems comparable. The presence of “dumb money” as it were is obviously present in both cases. Wealthy individuals with large amounts of money but little market knowledge looking to make quick gains were attracted to tech companies in the 90’s and are undeniably attracted to Crypto Markets today. The two markets also share similarity in their oversaturation with vaporware, products that are unlikely to ever exist on anything other than a conceptual level. These two commonalities however, while troublesome, are present to some degree in most tech markets, and they do not automatically mean bubble. One major factor that would in theory, at the very least, make the burst of the crypto bubble significantly different from that of the dot com bubble, is the open source nature of most development on nearly all major crypto projects.
The companies that saw massive explosions in stock value during the tech bubble were dependent on heavy investment in order to continue development, and a lot of money was lost because these companies were going bankrupt without having any results for supposed development. In the crypto space, with a number of exceptions, the development and code of a crytopasset can be contributed to by any one and there isn’t a “company” per se to go bankrupt. In many cases the “team” leading the development and marketing of a particular coin, does not even hold the majority of its supply. In fact a variety of cryptocurrencies have survived and even seen new heights, after the loss of support team, through either a community take over, or in other cases a hand off to another development team. As such a project’s success isn't as often dependent on the capital available to the team or “company” behind the coin in the cryptomarket as it is in an equities market.
There are of course instances, particularly in the case of increasingly popular Initial Coin Offerings (ICO’s), in which a crypto asset’s success is entirely dependent on the success of one centralized entity or company. These however simply represent the higher risk side of the cryptomarket, many other markets both in equities and alternative assets offer many higher risk investments. The choice to invest in these more centralized higher risk crypto assets as opposed to a more open source less risky project such as Bitcoin or Ethereum is entirely investor choice and can not fairly be seen as a reflection of the entire sector. With this in mind, barring the unlikely event of every capable developer with an interest in blockchain suddenly disappears, it is hard to see many major crypto assets concurrently disappearing entirely, on such a major scale, as happened to tech companies during the dot com bubble.
This leaves two other possible “bad endings” generally proposed by crypto’s detractors, a massive onset of buyer’s remorse, and death by regulation. The buyer’s remorse scenario, seems unlikely given the sort of ideological devotion that has kept many long time crypto believers invested in the space through times of much greater uncertainty than it is currently seeing. If even a fraction of the many new entrants adopt a similar mindset to these crypto veterans, a sudden complete drop off in adoption and spike in buyer’s remorse seems unlikely. As for the threat of government regulation, it is true that unilateral action by the government certainly seems the most likely event that would tank the crypto market, it is hard to see many governments banning the trade of an entire asset class. While it is true that the government of China has prohibited trade in large portions of the crypto market, it seems unlikely that action taken by western capitalist governments such as the United States would be nearly as wide reaching or hindering to use/innovation. As such, while government action is likely to change crypto markets in the near future it is unlikely that it will unilaterally destroy it.
The instinct of traditional investors to say bubble when looking at the present state of the crypto market is entirely understandable, and the instinct of crypto enthusiast to adminantly deny the presence of troubling elements in the crypto ecosystem is likely misguided. That being said, the argument of crypto deniers seems to be based entirely on gut feeling and a general belief in the principle of “too good to be true”. While neither of these are entirely invalid it needs be recognized that crypto assets and moreover the markets in which they trade are inherently different than all forms of investment that came before them, with this in mind, it needs be acknowledged that if the crypto space is in a bubble, the burst of said bubble will not follow the course of or look quite like any bubble bursts that we have seen in the past.
