Is Bitcoin a Bubble, a Fraud, or a Scam?

Article written in 2017 during the Bitcoin bull run.

As the world of cryptocurrency continues to heat up, several investment experts are starting to question the rise of cryptos, and some have gone as far as predicting that we will soon see the greatest financial crash in history.

The argument usually starts by saying that the crypto world is purely speculative, and that’s why most of the institutional investors have so far preferred to stay out of the game. Cryptos are then compared to tulip mania, the Nikkei’s crash and the dotcom bubble of the late 90s. Here’s a quote from the article I linked above that sums up the argument being presented by this bearish point of view:

Some have likened the cryptocurrency market to the Internet sector in 1999. While there was little doubt then, and clear evidence since, that those companies would take over the planet, the two Nasdaq indices fell an average of 90% in the 30 months ending 2002. This time, the bitcoin mania, which has dwarfed even the Tulip Bulb lunacy, should become the posterchild graduate school case study for not only finance, but also psychology, sociology, and perhaps other disciplines. Ironically, for lacking discipline!

I feel that it is good to think about how different scenarios could play out, and to try to adopt both a positive and negative outlook on things when investing, and then compare which side’s arguments make most sense. To sort out this conundrum, I asked my friend Marcel Ellis, who is a crypto expert and runs a few courses over at MoneyZoo.org.

Here’s what he had to say about the argument:

1) To compare Bitcoin to the Tulip Mania is silly.

2) Comparing the entire Cryptocurrency eco system to the dot com bubble is a much better analysis and I will discuss why and how parts of the article are relevant and others not.

The dot com bubble allowed for virtually any unknown to create IPOs to raise funds for whatever reason without any normal consideration of profitability or due diligence. We have a similar, if not worse, scenario today with ICOs which are endangering the entire crypto ecosystem – and I have been warning for 2 months about these ICOs.

Many companies during the dot com bubble were debt ridden with staff and investors living an overly lavish life. Giveaways of millions of dollars worth of prize money for contests were offered – which of course was silly considering the amount of debt they had. We don’t have this scenario with cryptos, at least that I am aware of.

3) Mass hysteria. Big yes and this worries me. While it is always nice to see gains, I know deep down that when there are huge rallies there will be huge dips of an almost equal proportion. Take NEO for example. Why has it spiked to $22 at the time of writing when just a few days ago it was $7. Something is wrong and in the crypto world, knowing what is organic growth, what is FUD and what is FOMO is even more critical than is the stock world.

Is Bitcoin in a bubble? Bitcoin has been in a bubble since the day it was born just like any other asset with perceived value like gold, or just like any asset with manipulated value like diamonds. Bitcoin can be compared fairly to both gold and diamonds as it has characteristics of both.

I think a more important question is to ask if the entire cryptocurrency ecosystem is in a bubble, and here I would venture to say YES to many of the cryptos and that YES they will bring the price of Bitcoin tumbling down for a while. This is a much-needed thing and will clean up the market for it to mature in much the same way the dot com bubble cleaned up the net with winners like eBay and Amazon eventually having larger valuations than pre bubble.

My outlook long term remains Bullish for Bitcoin and a few other coins but I am very bearish on around 98% of the crypto world.

I agree with Marcel’s point of view. While one can never predict the future, and there is indeed the possibility of a big crash that will wipe out the huge gains in Bitcoin’s value over the years, there is a lot of real value in this technology that surely can’t be considered worthless. We are still in the very early days both in terms of the technology and its applications and also in terms of adoption rates.

There have been various bullish predictions that counteract negative view on the future of cryptos, including a recent claim by a Harvard academic that Bitcoin’s price could hit $100,000 by 2021. At finance conferences this year, the vast majority of people I spoke to agreed that the goal for Bitcoin in 2018 is $10,000.

In a similar vein, I was following a discussion in Malta’s Bitcoin group on Facebook. The main point being discussed was whether Bitcoin is one huge bubble similar to the Tulip mania craze in the 17th century Netherlands. Given the articles we see in the media, this is a valid question to pose. One commenter, Jonathan Galea, left a comment that I thought was very well written and worth sharing on my blog, with his permission of course.

Here’s the comment from the Bitcoin Malta group.

FACT: the tulip bubble centred on a product which has no inherent value apart from being a plant. The right cryptocurrencies have inherent value which solve real-world problems.

FACT: therefore, the “crypto-bubble” should be likened to the dotcom bubble and not the tulip bubble. That’s your first mistake

FACT: the dotcom bubble peaked at 3 TRILLION dollars. Trillion with a T. The current total crypto market is worth $110 billion, with a small b. You can do the maths. Keep in mind that the dotcom bubble was reached at a time when social media and global connections were not the norm… and inflation has had its way since then too.

FACT: the institutional investors haven’t entered the playground yet. What you’re seeing are just BTC whales trapped in the crypto-ecosystem since there’s no regulation in place through which they can legitimately cash out their earnings. Either that, or they know that the bubble has not yet formed and there’s plenty of money to be made. Either way, they have purchasing power worth millions. A small BTC whale can easily invest 800 BTC.

FACT: Buying altcoins for normal people is still a laborious process. The people I’ve had to explain it to are normally-versed in tech and they still found it difficult without guidance. Until and unless crypto investments are easily accessible as least to the tech-savvy, then one can’t talk about a bubble yet. Once ETFs come into play, then we’ll see signs of a bubble forming.

FACT: 2018 will be the year when crypto-projects start coming into fruition and offering versions of their product to widespread use. Those who don’t deliver will die, the others will grow… fast.

FACT: At the height of the dotcom bubble, the average person on the street was talking about it. I dare you to randomly find at least 5 people out of 10 who can give you a satisfactory definition of Bitcoin if you were to conduct a survey in Valletta. It’s still nowhere near being mainstream; and if Bitcoin isn’t, let along the hundreds of other altcoins out there which are even more promising that Bitcoin.

FACT: Mainstream media were screaming bubble back in 2013 when BTC’s price hit $1200. It screamed it again when BTC’s price hit $1300 at the start of this year. Are you starting to see a pattern?

Are Cryptocurrencies a fraud and a scam?

Many have pronounced Bitcoin dead over the years, while others have said that it’s a scam or a fraud. Jamie Dimon, CEO of JPMorgan, famously also took aim at bitcoin, calling the cryptocurrency “a fraud” and “worse than tulip bulbs.”

Understandably, this came as a bit of a shock to the lay people who don’t really understand the fundamentals of Bitcoin and cryptocurrencies. As I said, this is by no means the first time that someone has pronounced Bitcoin dead or denounced cryptocurrencies, but unfortunately, statements from such prominent people always make the news.

Let’s be clear, Dimon’s firm is one of the chief architects of the global financial crisis that led to the interest in a somewhat arcane cryptocurrency in the first place. There would be no bitcoin without Jamie Dimon — and in some ways he’s right to fear its rise.

As a Vanity Fair piece revealed, JPMorgan Chase paid out $13 billion (with a “b”) to the U.S. government because of its role in the financial crisis and the mortgage security fiasco that almost destroyed the U.S. economy.

This goes to show that you need to be very careful where you’re getting your news and information from. There’s a lot of purely ridiculous stuff out there, especially in new spaces such as cryptocurrencies.

It is normal and actually recommended to approach Bitcoin and other cryptocurrencies with a criticial mind. They are obviously highly speculative investments and have no intrinsic value. However, they are also a whole new type of asset. To try and compare them to tulip bulbs is just naive, as I discussed in a previous post. There is really no direct comparison to Bitcoin and cryptos throughout history, and that is what makes it so exciting.

Unlike fiat currency, Bitcoin is fully transparent and controlled. We know exactly how many Bitcoins will exist in 5, 10 or 50 years. If you take a look at history and the ways that fiat currency has been manipulated and how many people’s lives were instantly ruined during periods of hyperinflation, amongst other government triggered actions, you would be hard-pressed to name Bitcoin as a fraud and not fiat currencies.