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3 Takeaways From Bitcoin's Bad Year
FinTech, Blockchain, Financial Services
It was at an investor conference in New York back in September 2017, as Bitcoin was surging toward record highs and pulling other cryptocurrencies up along with it, that JPMorgan chief executive Jamie Dimon declared Bitcoin to be “a fraud,” asserting that the world’s largest cryptocurrency by market value was “worse than the tulip bulbs.”
Dimon was, of course, referencing the tulip mania that swept through 17th-century Holland, when the prices of worthless tulip bubbles were being driven up by an unsustainable demand for these flowers, creating what many see as the world’s first speculative bubble. While Dimon later said he regretted calling Bitcoin a fraud, he remains steadfastly anti-cryptocurrency – even as he believes in the potential of blockchain beyond digital coins.
Suffice it to say, if 2018 didn’t exactly prove Dimon right about Bitcoin – we maintain that it’s still too early early to tell – this year likely raised doubts among many more people about the long-term viability of Bitcoin. After all, in these final weeks of 2018 Bitcoin is on track to suffer its worst yearly loss, as CoinDesk notes.
With that in mind, here are three takeaways from Bitcoin’s bad year.
1. It Was a Historic Crash
Jamie Dimon wasn’t the only Wall Street legend to issue warnings about Bitcoin during its meteoric in 2017: In an interview with CNBC last year, Ray Dalio, founder of Bridgewater Associates, said that Bitcoin “is a highly speculative market” that is currently “a bubble.” Dalio wasn’t as harsh as Dimon – not only did he refrain from calling Bitcoin a fraud, he actually reasoned that it “could work conceptually” as a currency if there wasn’t such a high level of speculation. But while we disagree with Dimon’s initial assessment of Bitcoin as a fraud, it’s hard to argue against Dalio’s conclusion that last year was a bubble.
Let’s look at the facts: Investors were getting “hilariously rich” in 2017 during – as Dalio correctly asserted – a highly speculative market for cryptocurrencies. And then in 2018 a lot of crypto investors went nearly broke, the Bitcoin boom went bust – with Bloomberg even comparing it to the infamous Pets.com wipeout – and the entire cyrptocurrency market plunged worse than the dotcom crash. If it looks like a bubble, acts like a bubble, and bursts like a bubble – it’s definitely a bubble.
2. The Crash Could Be a New Beginning
If we go back to Bloomberg‘s Pets.com comparison in its coverage of Bitcoin’s decline in 2018, there is a surprising silver lining: One thing the dotcom crash did – besides cleaning out investors – was clean out the market of all the failed internet companies who had no business getting the valuations they were getting. What we got after the crash was the greatest tech boom we’ve ever seen. Markets hit near historic highs, we saw the advent of world-altering companies – Google, Facebook, YouTube and many others – and the tech sector delivered the first trillion-dollar company in U.S. history.
Perhaps Bitcoin someday goes the way of Pets.com, becoming a footnote to a crash. Or, maybe Bitcoin becomes like Amazon, a survivor of the first wave that becomes wildly successful during the second one. Fred Wilson, co-founder of the New York City-based Union Square Ventures, recently drew parallels between the dotcom crash and the Bitcoin crash of 2018. Wilson, who was an investor during the boom and bust of the dotcom era in the late ’90s and early 2000s and also an early investor in Bitcoin, noted that “those who stayed [invested in the tech sector] were rewarded, although it took a long time for that to happen.” Wilson also believes that any payoff for Bitcoin will take a long time, that many talented people will leave the crypto sector before that happens and “things will get worse before they get better.” Nonetheless, while 2018 may represent the nadir of Bitcoin’s hype, it could be looked back on as a new beginning – but only if the right people learn the right lessons from this year’s hard fall.
3. Everyone’s Craving Stability Now
In the wake of the Great Recession in 2007-08, investors decided they’d had just about enough insane risk to last a lifetime. They were done with all those complex products that made no sense to almost anyone: Credit default swaps, collateralized debt obligations, etc. It’s why index investing has been surging in the wake of the crisis.
An underrated storyline – at least in the mainstream business press – in 2018 has been the surging interest and growth of stablecoins. These stablecoins are exactly what their name implies – price-stable tokens backed one-for-one by real assets or fiat currencies, such as the U.S. dollar, the euro or gold. One such stablecoin is Basis, which by April had raised $133 million from a murderer’s row of tech investors that includes Stan Drunkenmiller, Lightspeed Venture Partners, Bain Capital Ventures, Andreessen Horowitz and even former Federal Reserve governor Kevin Warsh. Meanwhile, Coinbase recently launched its first stablecoin – known as the USD Coin or USDC – making it the first stablecoin offered by the popular cryptocurrency exchange.
There are now about 50 stablecoins on the market today, according to CoinDesk, which makes it likely that 2019 will be a big year for this part of the crypto sector. If 2018 was cryptocurrency’s dotcom crash and Great Recession rolled into one, it only makes sense that investors are craving stability. The market desperately needs institutional money to finally come in, but that might not happen until the adults in the room finally take over.
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