The Blockchain: Just Another Bubble?

Everyone’s heard about Bitcoin by now. The blockchain-based cryptocurrency is ubiquitous in the media, not a day seems to be going by without the story of another Bitcoin millionaire and a new record high for the currency itself. But even in this gold-rush like climate, the first cracks are beginning to show: On Friday, Bitcoin fell from just under $20,000 at the start of the week to a low of around $12,000 and the voices warning from the purchase of Bitcoin are proliferating. Sir Howard Davis, chairman of the Royal Bank of Scotland, even said it was necessary to put up the sign from Dante’s Inferno: “Abandon hope all ye who enter here”.

The soaring prices of not only Bitcoin, but many other cryptocurrencies do indeed evoke memories of the dot-com bubble of the late 1990s and early 2000s. During that bubble, first-day returns of so-called IPOs (initial public offerings), where a company would offer its stock for the first time to the public, were up from an average of 22.2% for Internet companies before 1999 to an average of 80.6% from 1999 to 2000. A similar phenomenon can now be observed with cryptocurrencies, where many start-ups are raising capital by making an ICO (initial coin offering). An ICO is, very much like an IPO, the first opportunity for the general public to buy units of a new cryptocurrency, also called “tokens”. Whereas in 2015, you would struggle to find an ICO with a volume exceeding one million dollars, there have already been $2 billion raised through ICOs in the first three quarters of 2017. Another characteristic of the dot-com bubble was the mad scramble to invest in any company which had a “.com” in its name. The investors no longer saw the actual companies, but only their names and ticker symbols. In an event eerily resembling that kind of behaviour, the share price of the beverage company Long Island Iced Tea nearly tripled on Thursday after they rebranded themselves “Long Blockchain Corp”. Ordinary “stop-signs” like the company’s unprofitability (it has continuously lost money since 2014) or the absence of any concrete partnership with a blockchain company seemingly had no effect on the enthusiasm of investors about the announcement.

But all this doesn’t mean that blockchain is a bad and useless technology. It has the potential to form the basis of an entirely new industry, much like the Internet protocol suite (TCP/IP), which standardized the Internet and forms the basis of today’s Internet industry with its giants like Facebook and Google. Just like TCP/IP decentralized the Internet, the blockchain can decentralize everything from transactions to databases and create a new level of trust on the web, for example with the so-called “smart contracts” which allow two parties to make a deal and automatically implement it without an intermediary. But like the rise of the Internet protocol suite, which was initially envisioned in the 1970s, the advance of the blockchain is going to take quite a long time. Blockchain will have to be accepted and understood not only by a few geeks, but by the general public and the regulators in the world’s governments. The jobs of a lot of bankers, accountants and lawyers will be at risk and they certainly won’t leave their profession voluntarily. But once these obstacles are overcome, a bright future lies ahead for the blockchain.

In this light, the current cryptocurrency bubble can not only be seen as a giant waste of money, but also as a filter to sort out the bad and faulty concepts and only leave the most competitive companies surviving. In the aftermath of the dot-com bubble, a surprisingly large amount of 48% of Internet companies made it through 2004 and some, like Amazon.com, went on to become one of the biggest companies in the world. So when the cryptocurrency bubble bursts in the near future, don’t mourn the dead, but embrace the living who could conquer a new giant industry.

This article was originally published on December 25th, 2017 on medium.com.