Crypto is not going away but could be in an asset bubble.

“A basic principle in going short is that there has to be a catalyst” — Steve Cohen

It’s been over a decade since the introduction of Bitcoin, and whether you’re an active investor or think it’s tulips on steroids, there is no longer denying the significance of crypto as an asset class in the modern world. Institutional capital has been pouring into this space (Venture investors makes record $17bn bets on crypto), retail is overwhelming the exchanges and it is beginning to become mainstream as asset prices fly.

Are we in a bubble? What is the catalyst? Who is betting on this?

Infamous trader Michael Burry the man who correctly predicted the crash of the housing market in 2008 that led to the global financial crisis believes leverage is the biggest reason why the crypto market is in a bubble.

This is a highly valid point made by a credible person. Leverage is one of the biggest reasons crypto as an asset class has proliferated, leverage with stable coins like USDT or 100x margin trading provided by Binance and others.

What is a bubble? —An asset bubble occurs when the price of an asset, such as stocks, bonds, real estate, or commodities, rises rapidly without underlying fundamentals, such as equally fast-rising demand, to justify the price spike.

The crypto market fits this description:

as the market is over $2 trillion dollars total and you see the rise of dogecoin/memecoins.

Are we in a bubble in crypto? Yes but… there are many reasons why we got here and its not worth giving up on the space just yet.

One of the biggest reasons crypto as an asset class isn’t going away is the low-interest-rate environment filled with uncertainty; there is a considerable demand for returns from alternative assets, and Bitcoin/crypto fall into this category. This is sustaining the “bubble”, the overwhelming demand for an “alternative”. When everyone is touting 10x returns, it’s easy for investors to decide 0.05% APY ISA.

Another reason is that it is a new technology whose userbase/developer base is continuously growing. Ethereum has more active addresses than any other crypto network. This is not simply speculation, and many are using Ethereum blockchain and others for real-world use cases.

The final reason is that it provides unique access to global early-stage companies, niche markets, and new technology. The last few years’ growths have introduced mass retail interest from a pure alpha perspective, but we’ve seen how the great companies in the space have taken advantage of this demand.

Most notably Coinbase, Coinbase has just gone public via a direct listing. Thanks to the explosive demand, growth and euphoria of the crypto market, it has been listed at a near $100BN valuation.

What does this mean for the crypto market?

Crypto has entered the mainstream, most people would have heard of Bitcoin, some may have bought and used Bitcoin but overall the positivity around the market has come from the growth of assets prices and memes.

The crypto market which started with Bitcoin being an alternative currency system has now been distributed into many industries through its technological innovations including international payments, insurance, legal and many more. The crypto market is actually moving further away from the alternative currency system.

We are not in a new paradigm from a technological standard point but we are in asset prices, when a meme is worth several billion dollars you have to question the market cycle and how long can that last. This is one of the reasons “crypto” is here to stay because the market has evolved and still has a long way to go.

My belief is the crypto market’s first vertical is the sector of fintech and many fintech co’s will take advantage of the open-source technology to create companies that provide true value.

The above image is a reminded of when I first discovered Coinbase back in 2014, a simple wallet provider and from then on continued to build one of the most important companies in the space. Started in a small niche market to turn into a multi-billion dollar international business.

What we have to remember:

  1. Investing in crypto is no longer about relying on Bitcoin or digital asset prices. — Many companies in the crypto space rely on the price of Bitcoin to see any growth; Now the average retail investor can have exposure to the interest whilst mitigating the initial risk, Coinbase much like a bank, is profitable whether Bitcoin is $1,000 or $100,000 as it is an intermediary platform. Investors can now change their investment strategy when it comes to Bitcoin or crypto.
  2. Opportunity for new companies to follow. — Coinbase is the golden child of the crypto space, easily recognisable to all major crypto platforms. Other companies in the space previously used the ICO model to raise capital for their ideas, which worked until it didn’t. IPOs will open up the next level of what can be captured by the crypto industry; this will be an interesting trend to watch if crypto companies that provide more value than just trading venues can attract new public investors.
  3. Legitimacy as an alternative technology and future asset growth. — It is clear as day that everyone sees that Bitcoin is legitimately an alternative asset. Coinbase’s IPO just proved that the “traditional finance” world believe that it is legitimate too. Pension funds, larger investment managers and even regular retail investors still view Bitcoin as too risky from both a financial and security standpoint. Finally, those who believe that their interest in crypto will grow do not need to have direct exposure to any cryptocurrencies. This will change the space forever as we start to see more crypto companies actually offering value over speculation.

Although it appears that the legitimacy of the space continues to grow, we have to remember that this has all been a highly valued experiment and that the crypto market seems to be highly inflated as we’ve just seen Dogecoin go to $0.40 ($60BN market cap), and those who are hesitant are in their right to feel that way with the many irregularities in crypto. The most important thing is that you cannot ignore it anymore, you cannot deny its significance in society, and you must pay attention to this space.

As a fan, investor and participant in the crypto experiment since I was introduced to it eight years ago, I am impressed by its resilience. Eight years later, one Bitcoin is worth nearly $60,000, Coinbase has had one of the biggest IPOs ever, and the crypto market cap would be above $2TRN. Thanks to incredible market activity, dedicated people and great innovation, there’s no stopping the crypto industry now.

The next bear market will mostly wash away all of the junk, meme coins, bad actors and show that we were in a bubble. For now, this market is not going anywhere as there is still much to innovate and improve financial technology. Crypto, blockchain and open source technology will all provide more opportunities in the future.

Stay crazy.