History doesn’t necessarily repeat itself, but it often rhymes. You don’t have to look far to find comparisons of Bitcoin and other cryptocurrencies to tulip mania, a period in Dutch history when the flower’s popularity led to unsustainable prices and the collapse of the bulb market. Just two months ago, European Central Bank vice-president Vítor Constâncio referred to Bitcoin as “a sort of tulip.”
Some believe that cryptocurrencies are attracting unwarranted value. In late October, the stock price of U.K.-based capital market company On-Line PLC (LON:ONL) shot up almost 400% after the firm announced it would include the word “blockchain” in its name. Blockchain is the underlying technology behind cryptocurrency trading. Cryptocurrencies use blockchain as a public ledger comprising large numbers of decentralized transactions.
Cryptocurrencies’ high rate of turnover and limited real-world use suggest that buyers are after speculative gain and don’t intend to use cryptocurrencies for commercial transactions, according to a UBS Bank report titled Cryptocurrencies: Beneath the Bubble, released in October.
Cryptocurrencies are almost certainly in a speculative bubble, said Roham Gharegozlou, co-founder of Axiom Zen, a Vancouver-based tech company that does work in the cryptocurrency space. Gharegozlou said that the market is already starting to correct itself, and that as the market matures and more companies enter it, it will be easier for retail investors to separate the legitimate from the illegitimate.
However, not everyone is as skeptical about the sustainability of cryptocurrencies’ value.
“It’s not tulips,” said Peter Chow-White, a Simon Fraser University professor and director of GeNA Lab, an organization that investigates the impact of information technologies.
“Going up 200 basis points in a day is huge for the stock market, but in cryptocurrencies that’s a Tuesday,” Chow-White said. “Thinking that it’s a bubble is a profound misunderstanding of the space.”
Twice this year, Bitcoin has dropped almost 50% in mere days but both times recovered its value.
Chow-White argues that not only is there a misunderstanding of the volatility, but there is also a misunderstanding of the global implications of cryptocurrency exchanges, which are not bound by country borders or market closures.
Much of the alarm about crypto--currencies is being raised by traditional investors in the finance markets, for whom large-scale rapid growth is a sign of a bubble.
“It’s a very volatile market,” Chow-White said. “So part of the reason you don’t have a lot of institutional investors in there is because it’s incredibly risky. This is a high-risk game.”
The UBS Bank report raised doubts that cryptocurrencies will ever become a mainstream means of exchange. However, it found that the underlying technology, blockchain, is likely to have a wide-ranging effect on most major industries beyond the financial industry, including manufacturing, health care and utilities.
“Investing in the blockchain wave is akin to investing in the internet in the mid-’90s,” the report stated.
The report estimated that blockchain could add as much as US$400 billion in annual economic value globally over the next 10 years.
Blockchain is a way to organize databases by decentralizing them. New entries need to be verified by all users in the distributed database, which removes the need for a centralized system.
Unlike cryptocurrencies, blockchain has captured the interest of more traditional, institutional investors. Ninety per cent of banks in North America are exploring blockchain technology, according to a survey conducted by Accenture Mobility.
Cryptocurrencies are only one application of blockchain. The traditional financial industry is already taking advantage of the new technology. According to the World Economic Forum, by next year 90% of banks will have adopted it.
Financial firms could use blockchain to reduce transaction costs and improve the system for exchanging money between banks. Using blockchain technology to connect decentralized data hubs could help centralize health-care data, modernize power grids and improve telecommunications across global supply chains, according to the UBS report.
Chow-White said that last year there were only a few hundred companies operating in the blockchain space; now there are over 1,200.
“I wouldn’t say there’s a bubble at this point, although I can see why people think it is,” he said. “But I’d say it’s bubbling, it’s like a pot on a stove that’s just starting to bubble because it’s such early days in its adoption.” •