Just as each recovery and recession are different, so is each bubble preceding a crash.
The Internet bubble of the 1990s involved investors lying to one another about the prospects for stocks, pushed into the public market by “wise guys” in the venture capital world. There were losers, but at least we had our eyes wide open. We were warned.
The housing bubble of the last decade was about wise guys trading a lie called mortgage insurance. Those who bought the lie lost homes and fortunes. This was true even for those of us far from the bubble itself.
Popping a bubble creates financial waves. The bigger the bubble, the louder the pop, the bigger the waves. The last popping nearly took down the global economy.
Right now, we’re in what I call a wise guys bubble. Unicorns are at the heart of this bubble. Venture capitalists have convinced their investors that companies like Uber are worth what they claim they are. These values have not been tested in the public market. Those which have been went the way of Snap Inc (NYSE:SNAP).
Bitcoin, and other cryptocurrencies, are also a part of the wise guy bubble. The programmers, market-makers, traders and boosters behind Bitcoin have convinced many people that encryption keys have real value, that they’re not only money but better than money, because they’re not manipulated by government.
But they are manipulated by Wise Guys, as we saw this past week with the fork of Bitcoin and Bitcoin Cash.
At a stroke, we are told, $6.3 billion in new value was created. If you had Bitcoins on July 31, you woke up Aug. 3 to find you had both Bitcoins — worth even more than they had been — along with an equal supply of Bitcoin Cash. One BTH for each BTC.
Unless, that is, you had your Bitcoins parked at Coinbase, the largest Bitcoin exchange. Coinbase refused to accept the fork. If you chose a Coinbase wallet the way you would a bank — because it was big and therefore safe — you’re out almost $400 for each Bitcoin you had there.
That’s not all the shenanigans going on at Bitcoin exchanges. Another such exchange, Poloniex, changed its terms of service last week, deciding that it now owned anything its customers said about it on social media. Some critics claimed it was preparing to steal their Bitcoin Cash tokens and keep that money for itself.
There is no Federal Reserve for Bitcoin, or any other cryptocurrency. It’s the way banks were before the creation of the Federal Reserve in 1913, when a “run” meant the bank was running off with the depositors’ money and those who didn’t get out immediately were just out of luck.
Since few unicorns have gone public, investors are also in the dark about the value of their holdings. CB Insights recently counted 209 unicorns with a total valuation of $730 billion, more than the value of the Moscow and Tel Aviv stock exchanges put together.
Compared with this, the $101 billion value of the cryptocurrency market is small. But taken together with unicorns, that’s nearly $850 billion — almost 10 times the dollar volume of stocks trading on the New York Stock Exchange on a given day.
That’s also $850 billion in value that is backstopped by no central authority — value that its owners would likely have to recoup in the event of a crash by selling other assets.
When the Wise Guy bubble pops — and it will — the damage to the real economy is going to be massive.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Saves the World, a mystery novel involving Bitcoin, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities. To follow the value of crypto currencies, bookmark https://coinmarketcap.com/.