Finding the true worth of any asset class is very difficult in recent times. New technology means that market changes are happening quickly, and it is difficult to formulate valid studies and concepts when they are rendered obsolete so rapidly. Innovative asset classes are being created and the financial market is being disrupted. Figuring out is cryptocurrency really overvalued is no easy task. Additionally, the increase of quantitative easing policies means that valuation is even more difficult.
Is Cryptocurrency Really Overvalued?
The definitive way to measure value is by comparing one asset to another. So by indicating that bitcoin is a bubble, it must be in a bubble relative to the reserve currency, which is presently the USD. The general idea is that bitcoin is overvalued relative to the USD and its price will decline when the market finds equilibrium and the craze dies out.
But the total fiat derivative market is currently estimated at $1.2 quadrillion, of a total of $1.8 quadrillion of the world’s supply of currency, real estate, bonds, stocks, funds, and commodities. These are high-end estimates. If the value of all money (at $1.8 quadrillion) was transferred to bitcoin, one bitcoin (at $10,000) would be worth (roughly) $100,000,000. The figures are best estimates and take into account that 20% of the bitcoin supply is regarded as lost. But it is safe to say that bitcoin’s top is much further away than its bottom, even by vastly conservative estimates.
Bitcoin, incidentally, has no corporate infrastructure, no centralized governance model, and it is fast and practically free with the newly created lightning network. To suggest that it fails to represent a superior alternative to fiat, or at least generate some form of value, is naive.
Outside of some massive scandal or dystopian scenario, it is difficult to imagine how the current trend of cryptocurrency adoption would simply stop dead. 2018 has been by far the best year for cryptocurrency, with an onslaught of regulation, acceptance, and adoption. The case for a cryptocurrency bubble is quite thin.
The Tulip Mania Myth and Bitcoin the Bubble Buster
This Dutch tulip bubble is a popular reference for cryptocurrency antagonists, where tulip mania is held to have increased the price of tulips based on a market craze. However, during the supposed bubble, the price of tulips did not increase by that much, nor was the trading that frenzied. The selling was linked to a small number of business people and members of the aristocracy. Few, if any, went bankrupt. Despite being debunked, it is still often used.
The price of certain tulip futures increased and crashed, which has little to do with the asset itself. The grand irony of this misleading analogy is that mass bitcoin adoption would potentially destroy all such derivatives. With a fixed supply, bitcoin would be used to buy real things of value instead of exotic gambling products which are supposed to somehow benefit the economy. The fractional reserve model would come to an end.
Money printing creates bubbles, and without it, the derivative market could not be so overblown. The reason bitcoin has such upside potential is precisely because the fiat market is itself in one massive bubble. If central banks did not create these bubbles with money manipulation, then there would have been no real necessity for bitcoin, the bubble buster.
So, is cryptocurrency really overvalued? By a simple measurement of the estimated existing fiat supply, it is grotesquely undervalued. All bubbles are relative to each other, as assets can only be judged in comparison to their counterparts.
Digital Nomad with an interest in Zen and Blockchain technology.
Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.