The first major cryptocurrency run that topped in December 2017 with bitcoin around $20,000 featured initial coin offerings (ICO). These were "altcoins" that could be bought with other cryptocurrencies that essentially were similar to stock in a startup. The hype in the ICO market contributed to the rise in bitcoin and its decline as most ICOs valuations burst like Internet stocks during the dot-com era.
This bull market in cryptocurrency, which started in March 2020 with bitcoin around $5,000 seems likely to be defined by non-fungible tokens (NFT). NFTs are essentially digital tokens for collectibles with the blockchain used to prove ownership.
Bubble or Breakthrough?
Many consider this to be a bubble driven by hype and greed, while others see this as a technological breakthrough. The recent high-profile transaction was for $69 million from the artist beeple who produces digital art.
Another example of the rising popularity of NFTs is NBA Top Shots which essentially sells ownership of 15-second highlights of players. Then, these highlights trade on a secondary market. In one sense, it seems absurd that someone would pay substantial sums of money that anyone can see for free on TV or YouTube. However, the same could be said for any painting or sculpture.
Another example is people selling tweets as tokens. Twitter (Nasdaq: TWTR) founder, Jack Dorsey sold his first tweet through a platform with his first bid hitting $2.5 million. Anyone can read and see his tweets for free, yet the concept of turning them into an asset and treating it like the artwork is difficult to understand.
So, NFTs are a breakthrough in that they allow this real-world property to be adopted by digital assets which were not possible till now. Further, ownership is recorded on the blockchain which can't be tampered with because its maintenance and operation are distributed across thousands of computers across the world. NFTs can also include smart contracts which can give artists a cut of any future sales.
Lessons From the Past Bull Markets
Looking at the dot-com bubble and the previous crypto bull market, we can apply some lessons to the current hype. At some point, it's going to collapse especially since these assets have no cash flow to back them up. People are simply buying in the hopes that they will be able to sell it for a higher price in the future.
However, just because it's a bubble doesn't mean the technical breakthrough is invalid. Even some of the optimistics' projections about the Internet failed to realize its true size and potential, yet 90% of companies went bust. Similarly, bitcoin is starting to see more real-world applications and becoming a part of institutional investors' holdings, yet that didn't stop it from collapsing 75% after its top in 2017.