Bursting Bubbles

The cryptocurrency market is a $3 Trillion industry waiting to pop.

Cryptocurrencies are an all-electronic peer-to-peer currency founded to challenge the institutionalized banking system and replace centralized currency, which turned into a speculative financial bubble. In an economic context, a bubble generally refers to a situation where the price for something—an individual stock, a financial asset, or even an entire sector, market, or asset class—exceeds its fundamental value by a large margin. Coined after the great Dutch Tulip Mania, dating back to the 17th century when investors began to purchase tulips, pushing their prices to unprecedented highs madly, bubbles are commodities or markets that go up in value only to pop eventually.

Bitcoin, the first cryptocurrency, is a virtual currency created to provide an alternative payment system that would operate unregulated or free from central control. It is said to be more cost-effective than traditional banking systems and intended to be used by anyone with internet access, and transactions are more secure and done anonymously. However, the reality is far from these intentions.

China banned the use and mining of cryptocurrencies because the previous lack of regulation opened the floodgates to fraudulent and illegal transactions. The Ministry of Public Security said cryptocurrency disrupts economic and financial order. It breeds illicit and criminal activities such as gambling, fund-raising, fraud, pyramid schemes, money laundering, and seriously endangering the safety of people's property. It warned of "the risks of virtual currency trading speculation."

The use and mining of crypto have significant negative impacts on the environment for being resource-intensive. It needs hundreds of supercomputers and mining rigs to operate. GPUs produce heat like a slow burner. Massive air conditioning systems are up and running 24/7 to keep the GPUs in optimal performance. Do we really need an extra hand in melting the polar ice caps? I don’t think so.

Like stocks, crypto is kept complicated to gate-keep laypeople from understanding the system and make it seem more legitimate. Many stocks and cryptocurrencies are overvalued for this very reason. A stock is overvalued when traded at a price significantly higher than its actual earnings and revenue outlook suggests it should—a significant number of people who earn from cryptocurrencies bank on the ignorance of others. Most people, who have not learned about crypto and its system, invest out of the hype it has garnered.

Unlike centralized currencies backed up by gold or silver, cryptocurrencies aren’t backed up by anything. Crypto’s value is speculative or “is only in our heads.” Depression is more real than crypto’s value.

Dan Olson, a cryptocurrency expert, made an excellent allegory on cryptocurrency. He said, “Cryptocurrencies did not solve the banking problem but made a new medium, and they only changed the building’s name from Bank to Bitcoin and the guards from bankers to crypto enthusiasts. The problem is not the name of the building but the very nature of the people who run it.”

Let’s take LYKA, the social media app made famous by celebrities and social media influencers, as an example. If you’re not familiar with LYKA, it is a social network/e-commerce app that rewards its users for their time and engagement with GEMs or Gift cards in Electronic Mode. You can use these GEMs to pay shops for goods. During the pandemic, many shop owners agreed to use LYKA as a mode of payment to boost sales and keep their businesses afloat. However, in July of 2021, LYKA received a temporary restraining order from Banko Sentral. BSP halted all GEMs transactions because LYKA failed to register itself as an online payment system before the BSP. Hundreds of shops were left with uncashed GEMs. As of writing, LYKA is yet to resume its operations.

Subsequent regulation will significantly affect the operation cost of cryptocurrencies and their exchange rate, resulting in their devaluation. However, there is a need to regulate virtual currencies to build a more robust financial system. Now, which should come first? The chicken or the egg?

Some things are too good to be true for a reason. It’s only a matter of time for the bubble to burst.