Investment

The digital asset craze and the links with the late 90s dot-com boom

A record $30 billion of venture capital flooded into digital assets this year, adding momentum to an already buoyant sector.

The sum is quadruple the record set in 2018, according to Pitchbook, and part of a total of $100 billion applied to VC offerings, a majority of which were tech-driven.

Most internet IPOs went bust, unable to persuade investors to supply further capital. The Nasdaq dropped 77%, only recovering 15 years later

There were gains up to 20,000% in 2021 for digital currencies using their own blockchain, building on prices scraping zero at the start of the year. 

Data provider CoinGecko now records 11,900 coins in circulation, worth a total of $2.4 trillion, inspiring new generations of investors to trade them. 

AI systems which purport to master their volatility are being promoted. Institutions are trading crypto and, more often, their futures. Some companies, like Siemens, want to use blockchain for cash transfers.

El Salvador has adopted bitcoin as a reserve currency, despite a potential mismatch between the pay of local workers, who much prefer dollars, and its market price.

But all this excitement is creating a nagging worry among family offices. What happens when the tide goes out? What’s the point of it all? Are investors getting bored with bitcoin?

Twenty-five years ago the world experienced its first tech-driven wave, when promoters drove exciting narratives around new ventures and their new paradigm. 

The Nasdaq quintupled between 1995 and 2000 as investors piled into an array of stocks in technology, media and telecoms, seen as beneficiaries. Day traders, tip sheets and boiler rooms profited mightily. 

In 1999, 40% of venture capital money was put into internet companies. Markets saw 457 internet IPOs, plus 91 in the first quarter of 2000.  Time Warner was seduced into its purchase by AOL.

Demand for overpriced internet stock was fuelled by low interest rates. Fed chairman Alan Greenspan was tardy in raising them but when he acted investors started to worry about paying their mortgages and switched to cash.

A few e-commerce stocks, like Amazon, lived to fight another day. But most internet IPOs went bust, unable to persuade investors to supply further capital. The Nasdaq dropped 77%, only recovering 15 years later. VC entered a dark age. To this day, telecom values are below those of 20 years ago. Time Warner was bought by AT&T for $85 billion, roughly half the value of AOL’s paper bid.

Every internet venture was different but they fell as one because they were all victims of fear for the future. 

Fast forward to 2021 and we now see exuberance over an array of products which can be draped across one form or blockchain, or another.

Inflows are against being fuelled by low interest rates and bond repurchases by the Fed. Wealth adviser Marc Faber says all the repurchased cash has ended up in crypto assets, currently valued at $3 trillion. 

This year’s excitement surrounds blockchain applications in three sectors: digitally-unique Non-Fungible Tokens; the metaverse and cryptocurrencies. 

English football club Bradford City has been approached by a US consortium wanting to raise cash from NFTs to pay for a takeover. The first NFT artwork was sold for $69 million in March. Jack Dorsey, founder of Twitter, sold an NFT of his first tweet for $2.7 million. Melania Trump has jumped on the bandwagon with her own NFT platform.

Facebook has changed its name to Meta, after seeing big bucks in persuading individuals owning avatars to pay their way in one digital world, or another.

Mana, the crypto spent on virtual goods in the Decentraland metaverse has risen in value 3,500% this year. Coca Cola is a sponsor. One of its plots of “land” has been sold for $2.43 million to a virtual real estate investor.

The air is even more rarified in cryptocurrencies. Luna, promoted by Terra, was a top-performing coin in 2021 with a market value of $35 billion according to CoinGecko.

Starting near zero, it jumped 20,000% in 2021 after showing potential with stablecoins, pegged to fiat currencies, which accelerate cash payments. Its $78 billion  stablecoin rival Tether, which often facilitates bitcoin transactions, had a flat, but volatile, year.

Solana’s blockchain is perceived as quick and efficient and as was its price in 2021 which rose a notional 11,400% despite losing a quarter of its gains to November. 

Solana, worth $57 billion, is capable of supporting 65,000 transactions a year, against bitcoin’s seven, although there bitcoin fans are developing a rapid response through the Lightning, backed by billionaire Kjell Inge Røkke 

Dogecoin started the year as a joke but found favour with Elon Musk and has risen 3,600%, despite losing 80% of the gains it achieved to hit a record in May. 

Avalanche, billed as low cost, has risen 3,200%. It bills itself as eco-friendly. Bitcoin uses a price validation process criticized because of its hefty consumption of energy.

New crypto currencies often have smart-contract features which embed computer programmes on their blockchain. A cryptocurrency called Decentralized Social, which briefly spiked in mid-December, wants to develop social media applications which could change the shape of the internet.

Bitcoin’s ups and downs ended with a restrained 109% rise in a year against 212% from the broadly-based Bloomberg Galaxy Crypto Index. 

Fighting back against these innovations, bitcoin has become perceived as a core $933 billion play on macroeconomic events. If, say, the US economy hits the skids bitcoin would become a store of value.

Bitcoin supporters are firm believers in bitcoin’s safe haven status which has lately overtaken gold. 

But speculation over bitcoin’s resilience in adversity may not match reality. Several traders are worried because it has slid to a 30% discount to recent highs, despite fears of rampant US inflation.

The Fed has already taken action to slow down its bond purchases and raise rates next year. If rates rise and the economy continues to function, bitcoin’s speculative appeal as a safe haven may fade further.

Coin issuance at bitcoin is capped at 21 million. But 75% of its owners have a ‘buy and hold’ strategy which reduces market liquidity and contributes to price swings of 20%, a tedious feature of bitcoin’s hinterland. 

A study by Igor Makarov of the London School of Economics and Antoinette Schoar of MIT Sloan analyses the miners validating bitcoin trades, coin exchanges and ownership structures and finds they are surprisingly few in number.

“This inherent concentration makes bitcoin susceptible to systemic risk and implies that the majority of the gains from further adoption are likely to fall disproportionately to a small set of participants.”

The paper queried whether all these investors were suitable. Charlie Munger, vice chairman of Berkshire Hathaway, is critical of bitcoin’s volatility and lack of regulation.

SEC chairman Gary Gensler (ex MIT Sloan) has raised the possibility of regulating bitcoin, and other cryptocurrencies. He has allowed ETFs which track regulated bitcoin futures, but opposed those which track the coin.

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