Two of the most significant bubbles in recent history include the dotcom bubble of the 1990s and the housing bubble of the early 2000s. In some ways, these periods shared characteristics inherent to all bubbles: investor confidence proved to be too high for the underlying market to ultimately support it.
As cryptocurrencies have boomed over the past year, many analysts and investors have pointed to the digital currency space as the potential site of a new bubble. But if cryptocurrencies are, in fact, a bubble phenomenon, which of the earlier bubbles do they most closely reflect? (See also: Bitcoin and Altcoins: Are There 2 Crypto-Bubbles?)
Debt Bubbles and Tech Bubbles
A recent article on Coin Desk illustrates some differences between the dotcom bubble (as representative of tech bubbles more broadly) and the housing bubble (as an illustration of a debt bubble). In the housing bubble, the lingering impact of the bubble burst was $700 billion in bailouts and thousands of pages of new legislation. The collapse of the bubble prompted waves of foreclosures, public protests, and economic turmoil for thousands of families.
In contrast, the dotcom bubble left substantial new infrastructure in place. Of course, many investors of all types lost a great deal of money in the process of the collapse. However, the dotcom boom produced lasting positive effects as well, including fiber-optic cable networks, new technology regarding mobile computing, smart devices, cloud technology, and much more. It can be argued that many of the latest developments in technology, from the social media and e-commerce spaces to new startups, owe a great deal of their foundation to developments made in the dotcom boom.
Type of Bubble Has Major Impact
While it’s possible that cryptocurrencies are not reflective of a bubble, perhaps of greater concern to the financial world is the type of bubble cryptocurrencies could be. If a cryptocurrency bubble collapses, there could be significant financial losses, the loss of jobs, the failure of many businesses, and much more. However, it seems unlikely that the industry as it stands would require bailouts.
Digital currencies tend to be isolated from the broader financial system, potentially providing a buffer against interventions of this type. Unlike the housing market, which was linked to many other aspects of the financial system, cryptocurrencies tend to matter most to the individuals who hold them. In this way, the potential damage of a cryptocurrency bubble’s collapsing is less than that of the 2008 financial crisis.
At the same time, there are a number of potential positives that will remain even if the cryptocurrency industry collapses. Blockchain technology is perhaps the most obvious: the technology which supports the cryptocurrency industry has already proven to be useful to other industries as well. (See also: De Beers Using Blockchain to Authenticate Diamonds.) While a cryptocurrency may lose value or even die out, the technology the industry has ushered into the mainstream could have much broader applications.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin. It is unclear whether he owns other bitcoin forks.