Bitcoin follows dot-com bubble's footsteps

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Bitcoin hit its lowest price this year, which saw it trade at below $4 000.
Bitcoin hit its lowest price this year, which saw it trade at below $4 000.

Bitcoin is following the 1990s dot-com bubble trend, which resulted in some companies getting burnt while others emerged stronger.

So says crypto-currency market players after the world's most popular digital currency lost about 80% of its value in a single year.

Bitcoin hit its lowest price this year, which saw it trade at below $4 000. Earlier in the year, the price had stabilised somewhat to around $6 500. At its peak in December last year, Bitcoin's value dramatically surged to $20 000.

At the time of publishing, Bitcoin was trading at $3 500 (R49 262). Last week the price of Bitcoin continued to plummet, after the US Securities and Exchange Commission (SEC) postponed its decision to approve or disapprove a Bitcoin exchange-traded fund.

SEC commissioner Hester Peirce last week said she's fighting an uphill battle trying to convince the rest of the SEC to approve more Bitcoin exchange-traded funds.

The SEC plans to decide by 27 February whether to approve a proposed ETF from fintech company SolidX Partners and asset manager Van Eck Associates.

Excessive speculation

The dot-com bubble was a historic economic bubble and period of excessive speculation that occurred roughly from 1995 to 2000, a period of extreme growth in the usage and adaptation of the Internet.

The Nasdaq Composite stock market index, which included many Internet-based companies, peaked in value on 10 March 2000, before crashing. During the crash, many online shopping companies failed and shut down.

Marin Katusa, author and crypto-currency trader, notes that as with any new sector, there are going to be mega-highs and mega-lows in the Bitcoin market.

"The key is to not buy into the hype at the top and blow yourself up. Unless you're an ultra-early adopter, it's always better to let the market implode and then pick up pieces of the remaining businesses at fractions of what they were trading at during the boom."

According to Katusa, veteran investors from the dot-com crash or the resource sector have seen this game before.

"The dot-com bubble of the late 90s played out exactly the same way. Hundreds of companies rode the soaring wave of investor sentiment in order to cash in on the hysteria. Hysteria can only support valuations for so long, and eventually fundamentals take over."

He explains the collapse of the technology sector resulted in many businesses being put to the test. "Were their business models capable of sustaining themselves without the hype to prop it up? For many companies, the answer was no."

He notes over 75% of tech companies founded during the bubble went bust.

"However, from the ashes of the dot-com bubble would come some of the most recognisable names of our time: Amazon, Google, eBay. Many of the most familiar household names today not only survived the crash, but came out stronger for it.

"The moral of the story is this: after all the hype and mania is gone, the right companies will still be left standing and they will be thriving. I foresee similar things happening in the crypto/blockchain space."

Economic outlook

Michael Gokturk, co-founder and CEO of Einstein Exchange, which is a digital currency exchange, comments that Bitcoin has only been on the market for almost a decade, and in that short period, has been presumed "dead" by financial analysts and naysayers over 328 times, and still counting.

"It is impossible to predict the bottom of any asset's value, but we must remember that the value of Bitcoin has gone from $0.003 in the early days to over $20 000 in 2017, about a 6 600 000% increase in value, so some profit-taking is to be expected," says Gokturk.

"Adding to the sell-off is the overall economic outlook around the world in the equity and commodity markets, which causes more panic-selling and fewer buyers to soak it up due to the small market size in Bitcoin."

He adds that at the height of the Bitcoin market, all exchanges combined transacted about $70 billion in a single day (30 November 2017).

Today, he notes, "despite the market growth in new customers and new exchanges, we are seeing less than $15 billion per day. That is almost 80% less activity from the high," says Gokturk.

"However, we continue to see a rise in new customers on a daily basis, despite the current market. Many of our newest customers are coming to Einstein to invest in crypto-currency for the long run, not to actively day-trade.

"We have also picked up a lot of new institutional business during this period, all of which are buying currently. The selling is to be expected, from profit-takers in retail and institutional, to Bitcoin mining companies that need to sell to pay expenses."

Farzam Ehsani, co-founder and CEO of VALR.com, urges that, as always, investors should be careful with this nascent asset class.

"I always suggest that if you want to dip your toes into crypto-currency, put in as much money as you're willing to lose, but enough to make you pay attention. This will allow you to learn more about this world to better determine whether it's something worth getting more into or not."

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