What is the Cryptocurrency bubble? In this discussion I am going to examine technological revolutions and and the Age of Money or as it is often referred, Internet of Money.
Technology Bubbles
If you are not familiar with the book, "Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages" by Carlota Perez, I would recommend giving it a read. In it she examines the last five successive technology revolutions in great detail. It was written in 2002, so decentralized money (cryptocurrencies) is not addressed, but I think you can draw parallels to the current Age of Money revolution with the preceding ones. Each of the respective revolutions redefined industries and infrastructure, and each of them generally lasted about 50 years. Perez states that a revolutions will progress through the following three phases over the years: Phase 1: Installation Period, Phase 2: Turning Point, and lastly Phase 3: Deployment Period. In her model, all technology revolutions have two successive periods of growth, as shown below.
Last Revolution
Our last technological revolution was started in 1971 as the "Age of Information and Communications."
In examining the Information revolution, the installation period ran from 1971 to roughly 2000, or approximately 29 years. It was during this time we experienced a new fabric being laid on top of legacy business models. The fabric, such as the global communications infrastructure, email, internet, dramatic reductions in the cost of hardware coupled exponential improvements in capacity and processing power, was either ignored as a fad or a bolt-on to businesses. Consider the internet in 1994, the first browser was Mosaic. It was basically links to pages of text, and people would look at it and say this is worthless. Who would want click from link to link? It took another four years of innovation and imagination by early entrepreneurs and technologist to start to see opportunities for completely new business opportunities. During the end of the Installation period, there is a frenzy of capital investment, a bubble, and that is exactly what we experienced in the late 1990's. We saw an enormous influx of capital and new models seeking to transform every industry, most of which ultimately failed, due to timing. Remember Pets.com or Grocery Delivery, they were huge failures at the time, yet today those same models are flourishing.
Around 2000, we entered the turning point, which lasted approximately four years. A turning point is when the bubble burst and often accompanied by a recession. The recession creates the opportunity for institutional restructuring and routing growth towards profitable paths. During the turning point, is when a recomposition of the whole system occurs including regulation, which enables the economy to start to grow again.
In roughly 2004, we entered the Deployment Period. The deployment period is when the economy is rewoven and reshaped by the modernizing power of the paradigm, and the full potential of wealth is unleashed. The last 14 years have radically changed how we communicate, purchased goods and services, build communities, and receive information.
Next Revolution
The information revolution has lasted for 47 years, which begs the question, what is the next revolution? Will it be the Age of Intelligence or perhaps the Age of Money?
I think it will be the Age of Money, and then the Age of Intelligence. When you examine how we perform financial transactions, other than a few new bolt-ons (web, mobile, remote deposit, electronic bill pay) from the last revolution, how we bank is unchanged, how we purchase a house is unchanged, how we transact is unchanged, how we transfer money overseas is unchanged, how we finance ventures is unchanged, and micropayments are impossible.
If you have an account a two different institutions, can you easily, quickly and cheaply transfer money between them? For most people the answer is no, Not to even mention all the costs that are built into the system. You may or may not readily see them, but make no mistake that you are paying them either directly or indirectly in the cost of goods and services.
Granted, in the US we have one of the best systems in existence, but step outside of the US and you have people without access to financial services, and wealth destruction through hyperinflation, devaluation, and civil disruption.
Age of Money
The first decentralized peer to peer electronic cash or cryptocurrency, Bitcoin, was launched in Jan 2009. Using the model developed by Perez, we are clearly still in the earliest portion of the installation phase. If the end of this period is signaled by a recession, we are no where close to the bubble of frenzied investment. Less than 0.3% of the worlds population owns cryptocurrencies, and the whole ecosystem has a market capitalization (~$300B) less than one-third of any company near the top of the Fortune 100 list (~900B).
What you hear in the news is primarily noise. It is people who do not understand it or who can see the potential disruptive power of it to the global financial system and are afraid of it. The one benefit from all the news, is global awareness. People who may never heard of cryptocurrency, when it was mainly in the realm of the technologists, are now at least aware of its existence. With awareness comes interest, and interest leads to more people working on the solutions, increased investment, and ultimately broad based innovation. It is still too early to pick any winners, most will be nothing more than pets.com, a good idea long before its time.
The Internet of Money, as it is frequently referred, has the potential to empower billions of people across the globe by providing them the ability access, transact, store, and manage their money, on their terms, for low or no cost, and in near real-time.
The change isn't coming today, tomorrow, or next year, but it is coming. Welcome to the Age of Money.