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Market Bubbles

Market Bubbles

At Ghost staking we feel that lessons and analogies for crypto investment and specifically our investment in CSPR can be ascertained from analysing the following non-exhaustive key topics:

  • Coin specific information and data
  • Crypto generic market information and data
  • Market trends in other asset classes
  • Macro economic change
  • Regulatory impact
  • Structural shift in market behaviour
  • Historic events

Specifically in this piece we shall focus on historic events. We shall discuss the dotcom bubble, how we can make analogies with the crypto market and also how we can take assurances that our CSPR investment is a sound one when compared against the plethora of other coins and the potential for frenzied bubble risk.

DotCom Bubble

With a period of mass growth and adoption of the internet in the late 1990s there was frenzied speculation within dotcom companies which fuelled the rise in the price of the NASDAQ (a US technology stock index) to levels close to 5,000. The growth in the NASDAQ between 1995 and its peak in March 2000 was approximately 400%, only to crash 78% from the highs through to October 2002. The speculation was fuelled by views on the potential for future earnings as opposed to the then current more traditional metrics to value stocks.

The subsequent bust was triggered by a global sell-off in ‘Risk-On’ assets on the back of the news that Japan had once again fallen into recession. This coupled with the aggressive spending of dotcom companies and lack of revenues led to many facing severe cashflow issues with names such as pets.com (a much hyped company) going out of business only 9 months after completing its IPO.

During the bubble period, even names we are familiar with today, such as Amazon experienced aggressive share price rise, achieving a peak of x50 of its IPO price by December 1999, only to be followed by a loss of 90% of its value in subsequent 2 years.

Crypto Bubble 2017

Analysing the dynamics of the bubble, we can draw many similarities with the crypto bubble of 2017:

  • Crypto prices during that timeframe experienced a high degree of contagion, where rallies were exhibited by primarily retail investors not understanding the utility of coins being invested in. Therefore projects which were pitched as sound ideas, did not have any fundamental or utility in the tokens being issued (these were all pivoting to blockchain without sound reason). It was this lack of understanding of utility which caused the market as a whole to rally.
  • Because of the above factor, those who felt they had missed out on the upside of Bitcoin or Ethereum would speculate on most new ICO tokens, associating the potential returns as those of projects which did hold fundamental value. This then further snowballed via the contagion effect with newer investors eyeing previous ICO gains in addition to aggressive Bitcoin and Ethereum rally, looking for similar returns and therefore creating a demand for new projects to launch.
  • This the lead to many fraudulent projects launching in addition to tokens launched by celebrities, again with no real utility.

With the above factors in place, and with retail investors increasingly over leveraging themselves to invest, the market was not differentiating projects with long term potential from those more closely aligned to Ponzi schemes. This overheating of the market makes it extremely susceptible to triggers which would cause aggressive pull backs in prices. These triggers came in the form of a series of high profile exchange ‘hacks’ followed by government crack down in the Far East – which poisoned public perception.

The result of the above was a mass sell-off, coupled with liquidation of long positions (further forcing prices down) and an increase in shorts.

Coins with no real utility (barring some popular meme) would get crushed and never recover. Additionally, coins which did have sound fundamentals, innovative tech and real utility also suffered from aggressive pull back in price -the reason being they had exploded way beyond what the fundamental value of the tokens should have been for that point in time (i.e. for the level of adoption at the time). Also the contagion effect around the asset class and the speculative nature (without real adoption at that time), meant that any pullback would be highly correlated, which in fact, it was.

Emerging from that period are projects with sound tech, utility and fundamental value. As with how Amazon’s share price exploded beyond what the company was actually worth during the dotcom bubble, valid crypto projects coins price also exploded in 2017 beyond what the fair value of the coin should have been given the adoption at that time.

Consider the 1999 dotcom and 2017 crypto bubbles are similar in that investors and retail alike saw something new in both cases, a game changer or a ‘disrupter’ as it is often called. Knowing that it would likely dominate in the future, everyone wanted a piece of the action. The was no real understanding of where revenues would come from for dotcom bubble as there was no real understanding of utility in the crypto bubble, but more investment based upon a passion and FOMO for a technology which was obviously going to play a large part in the future.

Future Direction

Fast forward to today and the below chart representing the NASDAQ historical performance. What has indeed dominated are the large web based tech giants, such as Amazon, Google and Facebook. As predicted by the hype in 1999, the future was indeed driven by ecommerce and internet based phenomena such as social media. The issue was, in 1999 no one knew who or what would win – but the knowledge and belief was there that it would involve the web.

Just as with the emergence of both (1) legacy tech stock such as Google and Amazon, and (2) newer innovation such as Facebook, we will likely see the future of crypto both dominated by prominent legacy blockchains/projects such as Bitcoin and Ether, but also newer innovations and advancements in technology such as CSPR.

To close, I would like to add that a key failure of many companies during the dotcom era was poor management. This is a fundamental requirement to take a good idea and evolve it into a successfully adopted innovation. It is because of this, in addition to fundamental technology, that we believe CSPR will play a pivotal part in the future of blockchain adoption. Many crypto projects have failed due to poor management – an example being RChain. The direction and management within the CasperLabs team gives up confidence that what has already been successfully delivered, will also be successfully adopted with a substantial volume of projects developing on the blockchain.

Disclaimer: This article is written for the purposes of research and does not constitute financial advice or a recommendation to buy.

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