UPDATE: Cryptocurrencies are like that bubble in baseball cards in the 1990s
By Jonathan Rochford
Each variation of bitcoin claims to offer a unique angle, but almost all will die off
The old saying that history doesn't repeat but often rhymes sums up the fervor surrounding cryptocurrencies and blockchain. The media loves to write about something new and sexy, and the financial media loves to write about those things as well, especially when they involve volatile asset prices. As cryptocurrencies and their underlying technology, blockchain, satisfy all of those characteristics, there's daily coverage of their latest developments.
Investors often fall for shiny new toys as well. The original cryptocurrency, bitcoin, has risen from mere cents in 2010 to over $4,400 today. Some speculators use these returns to extrapolate a story of massive potential future returns for bitcoin and the over 900 other cryptocurrencies. A more pragmatic view is to see these returns and the wave of new cryptocurrencies issued each week as a sure sign of a speculative bubble.
Two examples from the 1990s can help us understand the mania surrounding cryptocurrencies and blockchain and their likely futures.
Cryptocurrencies and baseball cards
In 2010 Dave Jamieson wrote" Mint Condition," the seminal book on the baseball cards bubble of the late 1980s and early 1990s. In this recent interview on Bloomberg Odd Lots (https://www.bloomberg.com/news/articles/2017-09-18/odd-lots-the-baseball-card-bubble-can-tell-you-a-surprising-amount-about-how-markets-work?lipi=urn%3Ali%3Apage%3Ad_flagship3_pulse_read%3BAtTeG8IlSGW9AgdqPzMYYQ%3D%3D), he describes the background, the buildup and the eventual fall of this bubble. Baseball cards went from being a niche hobby to a big business in the space of a few years. Many new entrants began producing cards, flooding the market with variations on what is essentially a picture on a piece of cardboard. For some, the cards became an alternative form of currency, with kids and adults alike buying them with a view that the prices would increase and they would make a fortune. It was a classic Ponzi bubble.
The development of cryptocurrencies today mirrors that of baseball cards. In the space of a few years we've gone from a handful of alternative currencies to dozens of initial coin offerings (ICO) a week (https://www.icoalert.com/?lipi=urn%3Ali%3Apage%3Ad_flagship3_pulse_read%3BAtTeG8IlSGW9AgdqPzMYYQ%3D%3D). Each ICO claims to offer a unique angle on why it should flourish, but few pass the sniff test. For instance, developing technologies for the dental industry is a reasonable aim, but why fund it through the issuance of Dentacoin? Even Dogecoin, which was created as joke on the cryptocurrency scene, reached a market capitalization of $400 million.