Will the bubble continue? I believe it will. China ban notwithstanding, the ICO gold rush is nowhere near its end. Most institutional investors have yet to participate in the asset class. There are large sums of money from institutions and high net worth individuals about to enter the market through newly minted hedge funds. Most retail investors don’t know how to get their hands on bitcoins and ether. Relatively few people understand how Bitcoin works, let alone Ethereum. And polls indicate extremely few women are participating in the bitcoin rush (coin.dance publishes a weekly poll called “Bitcoin Community Engagement by Gender”, with the percent of male participants consistently above 95%). Bitcoin was created eight years ago, yet the blockchain industry is still in its infancy and mass adoption is yet to happen. Prospects are bright.
The main market risk is the potential of government intervention. China just banned all cryptocurrency exchanges, and nothing stops other countries from following that route. Governments are not precisely ecstatic with cryptocurrencies ability to avoid capital controls, nor with its use by tax evaders and money launderers. Furthermore, you can rest assured even the most pro free-markets Western governments would be quick to ban or heavily regulate cryptocurrencies if they were to grow large enough to have an impact in central banks’ ability to dictate monetary policy.
That being said, one may then ask, do current levels represent a good price to buy? Look into the following for answering that question:
On September 4 China banned ICOs, and on September 15 Chinese regulators announced cryptocurrency exchanges must stop trading by September 30. This has caused a significant price drop. Bitcoin fell from $4400 on Sep/4 to $2970 on Sep/15, before bouncing up around 30% on record volume on that same day. The ban is shutting out a fifth of current worldwide demand (for example BTC/CNY volume stands at 18% of worldwide volumes, per bravenewcoin.com). This will diminish capital flows into cryptocurrencies, but will not affect long-term fundamentals.
Ether has a history of flash crashes: on Jul/18/2017 ether dropped and bounced back a full 20% in just 3 seconds (it happened on the now defunct BTC-e exchange), and on Jun/21/2017 ether dropped from $319 to $0.10 in seconds, to almost fully recover in less than two minutes (it happened on the GDAX exchange; note GDAX did not cancel trades, those who profited from buying the crash kept their profits, yet GDAX compensated out of pocket those who lost money during the crash). An investor could use limit orders to take advantage of flash crashes.
The key determinant of prices is capital flows. The information for most upcoming ICOs is publicly available, and future ICO volumes can be estimated. Furthermore, institutional money is on its way. The day the SEC approves a cryptocurrency ETF, funds will pour in. Consider that current total cryptocurrencies market cap represents just 0.17% of assets managed by the top 400 institutional asset managers.
Think of market penetration. Some estimates indicate there are three million cryptocurrency users, which represents 0.14% of the 2.1 billion people in the world between 14 and 65 who have internet access. Can you imagine market penetration increasing to 5% within five years? That would mean 105 million users. What would happen with price then? Jeremy Liew, Snapchat’s first investor, thinks bitcoin could hit 400 million users by 2030, taking its price to $500,000. Would that be outrageous?
Bitcoin is expected to hard fork again by mid-November, bringing significant uncertainty regarding governance of the Bitcoin protocol and even greater 2-way price volatility. By itself, this is good reason to be bearish in the short term.
Patience, decisiveness and skepticism are crucial tools in the toolkit of the savvy investor. Is it time to buy? You decide.