How big can the bitcoin bubble get?

  • New asset class: the value of bitcoin has fluctuated between $12,000 and $19,000 during the last two weeks (Photograph by Tomohiro Ohsumi/Bloomberg)

    New asset class: the value of bitcoin has fluctuated between $12,000 and $19,000 during the last two weeks (Photograph by Tomohiro Ohsumi/Bloomberg)

  • Stan Stalnaker, founding director of Hub Culture

    Stan Stalnaker, founding director of Hub Culture

The marketplace for cryptocurrencies has this year expanded from $20 billion to around $450 billion. And it could be heading for $1 trillion, according to Stan Stalnaker, who helped create the world’s first digital currency, the Bermudian-based Ven.

He has shared his views on cryptocurrencies, highlighting the opportunities and the dangers.

“We see digital assets like Ven and bitcoin and everything else as a new asset class. They are not an equity and they are not a currency or a commodity. They are a digital asset, often a tokenised asset, that represents something else. It is that token that everyone is mad for right now,” he said.

As has been seen during the past two weeks, this new asset class is not for the faint-hearted. The value of bitcoin, the world’s best-known cryptocurrency, has swung from $19,000 to $12,000 and back to $14,000.

“The question is, is it a bubble? Yes. But how big is the bubble going to get and how much of it is fundamentally real, so that after the bubble bursts or a major decline in valuations, how much will be left over in this new industry?”

Mr Stalnaker is a founding director of Bermudian-headquartered Hub Culture, an online social network with 45,000 members around the world. The organisation created and manages Ven, a digital currency which has existed since 2007.

A number of countries are starting national cryptocurrency exchanges, with India due to launch its next month, and China will be close behind.

“In the US you have many exchanges cleared and operating with regulatory oversight,” said Mr Stalnaker.

Examples of exchanges in the US are Gemini, in New York, and GDAX.

“So, all of a sudden it is legitimate and it is being regulated and people are looking at the AML [anti-money laundering] and KYC [know your customer] and on-board funds. In a way, it has been co-opted into the main stream.

“There is a lot more room for growth. With the clearance on the Nasdaq and the CME it is almost inevitable that bitcoin will be on every exchange in the world, or most of them.”

Mr Stalnaker added: “Beyond that the top 20, or top 100 digital currencies will follow it onto the trading markets. So this is not day one, but it’s pretty much week two. It will hit a trillion dollar market, or more.”

But Mr Stalnaker also strikes a cautionary note.

“How much of that is froth and over-exuberance remains to be seen. But clearly a large portion of it is. The ultimate fundamentals are somewhat divorced from the reality of the prices right now.”

Looking at the wider economic picture, he said it is possible that digital currencies will be the “saviour” of the Federal Reserve. Noting that the Fed has pumped $1 trillion into the US economy since the financial crisis of 2008, he said money flowing into digital assets was “soaking up some of that extra dollarisation”.

Mr Stalnaker said: “Even if there is a crash in the markets, that will vaporise some of that extra money the Fed put into the economy, which will strengthen the overall economy.”

He said that if cryptocurrencies become too collateralised it would present a systemic risk. “That’s a very different thing. But at the moment these are credit assets, not debit assets, we are not borrowing against these things,” said Mr Stalnaker.

“It’s the credit side of digital assets that are creating all the momentum and value.

“People are putting money into this new asset. If the asset vaporises, as long as it is a credit asset and not collateralised, it should not have too much of an impact on the wider economy, and it would probably be good to vaporise some of that money that got plugged into the general economy.

“But if you’re a general investor you would not want to see it vaporised.”

And he warned: “We always tell people not to invest anything more than they are prepared to lose because anything can happen. An exchange could be hacked, the protocol could be hacked, and the markets could swing the other way.”

Looking ahead to where bitcoin might go next, he said: “Internally we thought there was a one-in-100 chance of bitcoin getting to $10,000, but now that it has hit that, we think there is a one-in-ten chance of it getting to $100,000.

“From a percentage gain standpoint it is all happening at what we call the alt coins. For example, ripple went up 300 per cent the other week.

“There are many different coins launching that have multibillion dollar, or hundred-million dollar market caps, and a lot of the money that is in bitcoin can flow out and go into those alt coins. So you could still see tremendous growth just because there is so much money sloshing around in the market.”

As for Hub Culture and its digital currency Ven, Mr Stalnaker said: “We are building a markets function on Hub Culture that will have pricing between fiat currencies and all sorts of digital assets so you can, at least ,compare pricing, and we have syndicates that are booming right now.

“A lot of people buying Ven are then going to the digital asset section of the store and investing in the syndicates.”

He said Hub Culture is also having discussions with a “major online retailer” that wants to include Ven in a possible new storefront.

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Published Dec 29, 2017 at 8:00 am (Updated Dec 28, 2017 at 10:18 pm)

How big can the bitcoin bubble get?

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