On New Years Eve, I sat in front of my laptop at Starbucks with a major life decision ahead of me. Although I had been utterly consumed with crypto for months, there was still something holding me back. As a naturally risk-averse person, I have stayed away from uncertainty my whole life. No blackjack. No sky diving. No mystery meat from the lunch room.
Remembering the days of putting every penny of my $10/hr in savings truly humbles your perspective of time and money. From a young age, I have valued time more than anything in the world; and that is exactly what money provides. Time. Although I could see the potential ahead clear as day, I struggled with pulling the trigger on investing more. Getting married in six months time and starting my “adult” life didn’t make the decision any easier.
Ten minutes before midnight, I followed my heart into the crypto abyss. While still a very small investment compared to others, I knew I had to get more serious than ever about being smart with this asset. How can I protect it? What is the road ahead? If the crpyto bubble does pop, how can I avoid the downfall?
The Dark Side
The most common thing people talk about in the crypto community is hope and opportunity, with the not-so occasional coin shilling in the middle. And rightfully so. The charts look like hockey sticks, the numbers are green, and people are already planning out which color lambo they are going to buy. But, what happens when all that stops?
The goal of this article is not to cause fear, uncertainty or doubt. It is to empower you to understand no matter what the market does; you control your own destiny. It is created to ask questions that nobody wants to talk about. It is written with the hope of helping you figure out an exit plan to save your bank account (and possibly marriage).
If the crypto bubble were to pop, what would it look like? What would be the causes? What would be the aftermath? These are absolutely critical questions we have to figure out. Let’s dive in.
Three things that cause bubbles to form
To figure out what would cause the crypto bubble to pop, we must first look at what caused the bubble to grow in the first place. As a frame of reference throughout the article, we will be comparing the dot com bubble for its similarities and tech connection.
Between 1990 and 1997, the percentage of households in the United States owning computers increased from 15% to 35% and the Information Age was born. As a result of the rapidly-increasing usage of the Internet, many investors were eager to invest, at any valuation, in any company that had one of the Internet-related prefixes or a “.com” suffix in its name, leading to a stock market bubble.
The value of the Nasdaq Composite stock market index, which includes many technology companies, rose from 1,000 in 1995 to 5,000 in the year 2000. At the height of the boom, it was possible for a promising dot-com company to become a public company via an initial public offering and raise a substantial amount of money even though it had never made a profit—or, in some cases, realized any material revenue whatsoever.
It seems so obvious and silly in retrospect. But is this really any different than what is happening today? In current crypto economics, a team of three people with a fancy worded white paper is capable of raising hundreds of millions of dollars; in a matter of minutes no less. This ability to jump over the long IPO process has caused growth rates that far exceeds the growth of the dot-com era.
In retrospect, it is easy to see why the dot com bubble occurred. Overvalued companies and inflated expectations. While hindsight is always 20/20, there are some very common characteristics we can see to better help us detect future collapses.
1) Assumptions of market growth
2) Excitement of potential value
3) Expectation of investment opportunity
As soon as these assumptions, excitement and expectations have met their match, the cookie crumbles and the true value of a company is left over. Now let’s see how this fits into crypto.
Three things that could cause the crypto collapse
There are many assumptions currently being made in crypto community:
- Crypto is young in its infancy with a lot of market growth ahead
- Crypto has new blockchain technology that far outperforms all other technologies
- Crypto is only going up so it is a great investment opportunity
At of the time of writing this article, all of these statements seem to be pretty obvious and plausible. Now, let’s look at the three possible ways these assumptions could be turned upside down.
1) Government Regulation
The first reason is probably the most obvious: government regulation. While crypto currency was created to inherently avoid the involvement in government, there are still many years of uncertainty ahead of us.
On December 5th of 2013, the People’s Bank of China announced that Bitcoin was prohibited for Chinese financial banks to operate using bitcoins. The value of bitcoin dropped 11-20%, before eventually rebounding to higher growth.
Specifically in America, there is a lot possible scenarios in which Trump comes down hard on regulation. As the president is already at odds with many in the tech community, and implemented tax laws on crypto currency, we can only speculate on what is ahead.
Trump acts swiftly on things he wants to doesn’t like, as we saw in the illegal immigration . We can only hope his twitter beef with North Korean dictators keeps his attention away long enough to not push the red button on crypto law.
2) Unmotivated Money
In traditional economics, companies must first provide value before being rewarded. When you wanted to make $5 as a kid, you offered to wash your parent’s car. When you wanted to make $10/hr as teenager, you flipped burgers. When you wanted to build a billion dollar company that went public, you built a sustainable business with revenue and achievements (unless you’re snapchat of course).
All of this logic is thrown on its head in crypto. Money comes first, with the promise value in the future. Will people be more or less motivated without the need to produce? Will this cause teams to move and grow faster, or become lethargic and uninterested? This remains to be seen, but, the first signs of this new crowdfunding method to not work from a psychological perspective, the bubble will begin to pop.
3) Ethereum Drop
Yes, as of now, Bitcoin is still the king, and could be for many years to come. However, this does not mean it has the most control over the market. If Ethereum were to tank, it would cause a nasty spiral of events. Let’s look at why.
Ethereum, a blockchain based technology, has over one hundred other coins built on top of it. In addition to this, many of the magical million dollar ICO’s were funded with Ether, the primary currency of Ethereum. While many of the companies are hopefully smart enough to diversify their funding, it is safe to say that a majority of the assets that these companies are running off of are powered by Ether. Ether is how they pay employees. Ether is how they liquidate their investments. Ether is the heartbeat.
If Ethereum were to take a downturn, these companies would have less money to invest. Less money to invest leads to less runway for creation. Less runway for creation means more companies going out of business. More companies going out of business means fear in the market. Fear in the market means crash. This situation scares me more than government.
Three things to best protect yourself if the market does crash
Looking back at the dot-com bubble for reference, the total market dropped 78% and took 2.5 years to truly hit its bottom. While it has since recovered, millions of people lost millions of dollars in the process. Attempting to compare the rate and amount of the dot-com to the crypto era is extremely difficult.
While it took 3 years for the NASDAQ to triple in price, the crypto market has managed to achieve the same feat in 38 days.
Yes, you read that correctly. From November 30th to January 7th, the market has tripled in value from $277B to $819B. The cryptosphere is growing at an astronomical rate. Here are the three things you can do to help protect yourself against an astronomical collapse.
While the ideal situation to protect yourself would be to pull your money out into fiat cash, we all know the headaches and pains of transfer times, fees, and congestion during major market events. To counter this, a company called Tether has created a coin that never fluctuations in value, always staying at $1 USD.
The last thing you want to happen is to be at work when such an event could take place. Imagine being in a meeting with Mr. Bob, assistant to the regional manager, and watching helplessly as the numbers drop. By putting simple stop-losses to exchange your crypto currency to fiat at certain incremental drops, you are mitigating risk and may sleep better at night. Figure out your risk tolerance level (10-25-50%) and Tether your coins.
One major disclaimer. There has been speculation on the amount of money Tether has in its reserve. For whatever reason, if everyone tried to pull their money out at the same time, we are not certain of the outcome. Use Tether at your own risk and do your own research before putting your life savings into it.
The easiest thing you can do right now to be prepared is to be alert. There are multiple mobile apps out there that allow you to set alert notifications on your phone. While this can be a double edged sword in term of consuming yourself with every little bump and hiccup, by putting in major percent changes could save you. The current best mobile apps for this purpose are:
During the dot-com bubble, even the giants were wounded. Google, eBay, Amazon, Ciscso, just to name a few, saw the valuations crumble overnight. In crypto, there is a lot of fluff. A lot of fluff. If only half of the major companies made it out of the dot-com bubble, the amount of crypto companies to make it out is going to be even lower.
There are currently over 1300 coins to trade according to CoinMarketCap. Only a handful of these actually have a product. Only a handful of those actually have a use case. Only a handful of those use cases are profitable. As 1 in 10 startups survive more than five years, many are speculating that as many as 99% of these coins will not exists in five years time.
All of this being said, by choosing companies with true, long lasting, impactfuk technology, a bubble popping is only a temporary dip. Since the crash, all of these giants have recovered and far surpassed previous valuations.
Do your research on your coin. Is it needed? Or is it just good marketing. Can you see it having real world utility? Or did they just throw the blockchain into an already existing idea. These are things you need to think about that will ultimately protect you from years of regret.
“A friend of mine has a great line. He says ‘Nothing important has ever been built without irrational exuberance’. Meaning that you need some of this mania to cause investors to open up their pocketbooks and finance the building of the railroads or the automobile or aerospace industry or whatever. And in this case, much of the capital invested was lost, but also much of it was invested in a very high throughput backbone for the Internet, and lots of software that works, and databases and server structure. All that stuff has allowed what we have today, which has changed all our lives… that’s what all this speculative mania built”. – Venture capitalist Fred Wilson