With the sudden rise of Bitcoin (CCC:BTC-USD) from the grave, it didn’t take too long for other cryptocurrencies to follow suit. Arguably above all other altcoins, Ethereum (CCC:ETH-USD) generates the most interest as its developers took the original blockchain concept and made it much more than a decentralized peer-to-peer payment network.
Thanks to its smart contract innovation, it’s now possible for Ethereum users to replace old business paradigms built on intermediary-enforced trust. While it’s nice to think you can trust your fellow human being, in reality, it’s better to establish deals in writing. Of course, the problem is such writing involves attorneys and other middlemen entities.
But through the Ethereum network, all terms of a contract can be codified in its blockchain. Moreover, the ETH architecture can play the role of escrow agent, releasing funds to contractors only when the terms of the contract have been satisfactorily fulfilled.
From a computer engineering standpoint, Ethereum is a brilliant innovation, as are other blockchain projects that followed. But the lingering challenge for ETH and the wider crypto complex has been credibility. But with institutional money moving in, this is the opportunity that so many blockchain advocates have been seeking.
For instance, GoldenTree Asset Management recently declared that it’s adding Bitcoin to its balance, part of a growing number of major financial institutions supporting cryptos. Obviously, the more the merrier as for as pricing is concerned. Further, the bullishness sets up a modern-day tulip mania scenario.
As you probably know, critics often throw the term tulip mania to blast crypto speculation. However, what history demonstrates is that if you know when to call it quits, you can make tremendous profits. First comes the early adopters, then comes the institutions and finally the public masses.
In other words, we might still be in the early innings of this game.
Be Careful Trying to Outsmart Ethereum and Crypto Sentiment
Over the weekend, I came across an article that showcased Dan Morehead, Pantera Capital founder and early Bitcoin adopter. According to his assessment, Bitcoin’s terminal velocity is $700,000. As part of the thesis, Morehead cites money printing and multiple institutions entering the space. If true, Ethereum will likely tag along for the ride.
In addition, there’s precedent for such extreme valuation spikes. As we know from tulip mania, once big traders and institutional players start making ridiculous money, the public at large wants in. When the shoeshine boy starts giving investing advice, that’s when you sell out. Not any time sooner.
It’s an interesting thesis. And it could be entirely incorrect. As the Smithsonian Magazine described it, what we’ve come to accept as sacrosanct about tulip mania could be nothing more than “tetchy Christian moralists” concocting an exaggerated tale to scare people into financial prudence.
Indeed, author and researcher Anne Goldgar stated that regarding the masses foolishly piling into tulip bulbs, “There weren’t that many people involved and the economic repercussions were pretty minor.” Goldgar added, “I couldn’t find anybody that went bankrupt. If there had been really a wholesale destruction of the economy as the myth suggests, that would’ve been a much harder thing to face.”
That got me thinking about this institutional procurement argument. Crypto proponents gleefully proclaim that the big dogs are buying Bitcoin, which bodes well for Ethereum and other digital assets. But exactly how levered up are they and will it be enough to indefinitely support robust crypto valuations?
If I’m interpreting the real lesson of tulip mania correctly, it’s that yes, speculation is running wild in cryptos. But it may be because those big players that are speculating can afford to lose whatever they’re putting in.
Put another way, the institutions might not be as dumb as some folks think they are.
The Risk of the Mundane
As someone who owns cryptos but has been dumping out of vast positions out of sustainability concerns, I’m able to see the digital asset market with more clarity than say a HODL-er, or someone holding on for dear life. Thus, while Ethereum and the altcoin complex does offer near-term upside potential due to the influx of institutional money, that might not translate to broader public acceptance.
Again, if we are to extract the real lessons of tulip mania, it’s not just institutions that some of us may not be assigning proper credit to but also individual retail investors. Yes, many people will gamble on Ethereum and other speculative trades such as meme stocks, but everybody has a breaking point.
As it turns out, the true historical record revealed that most everyday Dutch citizens had the good sense not to go crazy with investments that have an expiration date. And while anything is possible, perhaps the greatest threat to buying cryptos at these elevated prices is that people are just not so sexily scandalous as we might secretly want them to be.
Under the weight of truth, most people are rather mundane. And such banality is the antithesis of what has been driving cryptos all these years.
On the date of publication, Josh Enomoto held a LONG position in BTC and ETH. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
