The 2021 Crypto Bubble Is Unlike Anything We’ve Seen
On Wednesday, Ethereum (CCC:ETH-USD) co-founder Vitalik Buterin donated some $1 billion in Shiba Inu (CCC:SHIB-USD) crypto to help India fund its Covid-19 response.
The strange thing? Buterin never bought the Shiba coin himself.
Instead, the Shiba community had gifted him the crypto as a joke. By sending him 50% of the outstanding coins, the gag went, the currency would become immune to a “rug pull” where controlling stakeholders hijack the coin for personal gain. Other joke cryptos — from Akita Inu (CCC:AKITA-USD) to Dogelon Mars (CCC:ELON-USD) — have since done the same.
At the time, the 505 trillion Shiba coins were worth precisely $0, according to CoinMarketCap. Their first recorded price five months later — a princely sum of $0.0000000013 — would have valued Buterin’s coins at just $560,000.
Fast forward to today and his SHIB coins alone are worth well over $9 billion. His other holdings add several billion more.
Already in 2021, cryptocurrencies have become one of the strangest financial manias in human history. Since January, digital currencies have added more than $1.3 trillion in market capitalization, growing far faster than the Nasdaq bubble of 1999. Traders have bought and sold trillions of dollars in cryptocurrency in the first five months of this year, even more than Americans spend on housing annually.
As financial institutions start jumping into the fold, things will only get stranger. Much like the media giants of 1999, the U.S. banking sector of 2021 has begun rushing into an industry for fear of missing out. Whenever banks have run into an industry they don’t quite understand, the results have always been the same: historians look back and ask, “what on earth were those morons thinking?”
The 2021 Crypto Bubble: Echoes of 1999
So far, the rise of cryptocurrencies has followed the same pattern of most asset bubbles:
A grain of truth emerges (the idea that cryptocurrencies can help grease the wheels of finance). As the dominant players win (i.e., Bitcoin (CCC:BTC-USD) and Ethereum rise), the initial grain of truth gets stretched to extremes (the idea that all cryptocurrencies must win). The bubble bursts, leaving speculators with severe losses.
The 1999 tech bubble followed this arc to a tee. For example, in 1999, one University of Pennsylvania study counted no fewer than 1,500 online marketplaces, as companies scrambled to join the internet revolution. Legacy firms like Mattel (NASDAQ:MAT) and Time Warner (now owned by AT&T (NYSE:T)) went on to splash out billions in buying these unprofitable tech moonshots.
But the bonanza didn’t last.
By 2004, only 31 had survived. Of those, only one public company — 1-800Contacts — ended with a price above its initial public offering. The remainder would spend years recouping lost share prices. (It would take Amazon (NASDAQ:AMZN) almost a decade to break out of its $90-range.)
As for the legacy firms that bought in on fear? Time Warner would eventually write down 97% of AOL’s value, while Mattel would sell The Learning Company for a “catastrophic $27 million.”
Fools Rush In
Legacy banks have already started feeling the echoes of 1999. Much like the rise of digital media companies, today digital currencies pose an existential threat to existing players. Every dollar of deposits lost to Bitcoin or central-bank digital currencies means less available for lending.
Many point to Facebook’s (NASDAQ:FB) Libra as the “Sputnik Moment” for banks. If a tech firm could issue a currency, why would customers need commercial banks?
In response, bulge-bracket banks have rushed to develop in-house crypto platforms. Those without the means have started splashing out on acquisitions instead. According to PwC, a global consultancy, crypto deal-making already doubled in 2020 to $1.1 billion — a minor but rapidly growing figure.
Now, 2021 has turned out even stranger. This week, the Andreessen Horowitz-backed Internet Computer Price (CCC:ICP-USD) quickly hit a $45 billion valuation. Today, it is the ninth largest cryptocurrency in the world by market cap. Few developers back the new currency, but its star-studded team was enough for investors to buy in.
This Time It’s Worse: The Rise of ScamCoin
It’s no surprise that the 2021 crypto bubble has inflated far faster than the 1999 tech one. Unlike dot-com companies, a skilled programmer can create a new cryptocurrency within minutes.
Many tokens on the Ethereum or Binance (CCC:BNB-USD) blockchain don’t even bother with innovation — coins like SafeMoon (CCC:SAFEMOON-USD) copy their code directly from existing tokens. CoinMarketCap now counts over 5,000 different digital currencies. Adding in Ethereum and Binance’s token contracts puts that figure well over 700,000.
In April, one TikTok creator made a coin called “SCAM” to highlight the absurdities of these copycats. “I just made the coin as a joke,” said Andre Lewis.
The internet had the last laugh, sending the coin to a $70 million valuation within an hour. Within four days, the token would reach a peak value of almost $12 billion before Lewis shut the entire project down.
How did this happen? In their rush to adopt digital currencies, institutional investors have created an aura of legitimacy around cryptocurrencies. Today, firms from JPMorgan to Citibank publish glowing reports on six-digit price targets for Bitcoin.
That means legitimate cryptocurrencies like Ethereum now trade alongside jokes like Shiba Inu. As more cryptocurrencies join the fold, it will become increasingly difficult to tell them apart.
Will Any Crypto Win?
To a certain extent, all cryptocurrencies essentially serve the same purpose — to help investors record monetary and real-world transactions. Ethereum and its “Ethereum killer” competitors — like Cardano (CCC:ADA-USD) and Polkadot (CCC:DOT-USD) — track nonfungible items in the real world. Meanwhile, Bitcoin and competitors like Dogecoin (CCC:DOGE-USD) and Litecoin (CCC:LTC-USD) act as stores of digital value.
That means the survival rate for cryptos will likely be lower than those seen by 1999 e-commerce companies. When coins like Litecoin and Dogecoin have practically zero technological differentiation, there’s no practical reason for both to exist.
Like past bubbles, retail investors will be the first ones to lose. Currencies like Dogecoin, SafeMoon and Shiba Inu have already lost traders billions from peak to trough. Copycats like Dogelon Mars, SafeMars (CCC:SAFEMARS-USD), and Akita Inu will likely keep these miniature boom-bust cycles going.
But institutional investors will eventually inflate the broader bubble to a breaking point. From the Savings and Loan (S&L) Crisis of the 1980s to the mortgage-backed bonanza of the mid-2000s, financial institutions have a long history of taking good ideas to terrible extremes. Just like one Citigroup (NYSE:C) executive said in 2007, “as long as the music is playing, you’ve got to get up and dance.”
In the near term, that means Bitcoin and its blue-chip altcoin counterparts will continue to see their values inflate. Financial institutions seem intent on keeping up with central banks and tech firms in adopting digital currencies.
In the longer term, however, most cryptocurrencies will implode. Like Amazon’s competitors that went bankrupt, most of the 700,000 tokens today will disappear. Just like the 1999 bubble, we’ll look back at 2021 — a year where billions in Dogecoin rested on a single SNL performance — and wonder “what were those morons thinking?”
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
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