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Bubble or Not: What Happens to Ethereum?

Is the Ethereum bubble about to burst?

24Nov

Whenever an asset starts to do well, people inevitably start the 'is it in a bubble?' conversation. Bubbles are the colloquial term for when rapid growth in an asset’s price occurs and is then following with a crash. Fundamental value is often ignored during bubbles and investor sentiment takes priority over all, and the result is usually quite messy. Two recent examples of bubbles that burst in a somewhat spectacular fashion are the dotcom crash of 2000 and the housing crisis in 2008. Both involved what can be concluded to be insane valuations in retrospect, but were influenced by a mania of sorts at the time.

Ethereum is still a valid idea

The debate on whether Ethereum is in a bubble has been running for years. And while some experts have been waiting for the Ethereum bubble to burst, the ETH to USD rate has kept on increasing steadily, which attracts more investors to Ethereum as a stable asset.

The sentiments regarding cryptocurrencies in general are that a bubble is highly likely, this applies even more to Ethereum. The varying use cases of Ethereum mean that very few people actually understand what it is and what it can do. This results in a lot of dumb money getting thrown around with very little comprehension of the long-term utility of Ethereum.

A bubble is always a worry, and with an asset as unregulated as Ethereum, it is very possible. The question is, what would happen to Ethereum if its bubble were to ‘pop’? Would it disappear? Joseph Lubin, the co-founder of Ethereum believes it to be possible, but points out that it isn’t a bad thing. The business model of Ethereum isn’t affected by the price, and with anything that catches on quickly, popularity ebbs and flows rather than experiencing consistent growth. Joseph reframes the idea of a bubble to mean a lot of attention followed by a drop in the price. The price dropping doesn’t mean Ethereum is not a valid idea, it would only mean that at some point the cryptocurrency was valued at more than its fundamental value.

Volatility can be seen to be a problem, but it is generally expected with anything this new. If a new currency were to be established today, no one would expect its exchange rate to the USD to stay constant. The market is still adjusting and gauging the asset, and there is no reason to expect the resolution to happen instantaneously.

Survival of the fittest

As we saw with the Internet bubble of 2000, a lot of crappy companies got created during a booming time for technology. This doesn’t mean that the Internet is useless or has no merit, it just means that the quality of companies follows a normal distribution and some companies probably never should have been started in the first place. This is likely true of the cryptocurrency industry as well. There are a lot of poorly construed ideas out there, and not all of them deserve the consideration they are receiving. But just because these companies are going to rightfully go under when a market adjustment occurs, does not mean that Ethereum has zero value.

Based on the opinions of many who are involved with cryptocurrency and blockchain technology, Ethereum seems to be the top choice for the cryptocurrency that is most likely to change the world. This could very well be the rare case where the market is right and Ethereum does deserve its high value. As the cryptocurrency with the second highest market capitalization ($28 billion), it could be true.

What if the bubble were to pop...

But this article isn’t about whether Ethereum’s price is justified – it’s about what would happen to Ethereum if it turned out to be a bubble and the price dropped significantly. First, it is important to understand what Ethereum is and why it is special. Rather than being a simple digital currency that happens to run on blockchain technology, Ethereum is actually a computing network that runs based on 'Ether,' the currency component of the Ethereum ecosystem.

Ethereum network becoming a 'world computer' of sorts and bringing in an age of automation and decentralization. There are so many potential end uses for the technology that it seems to have an almost limitless capability. So the question becomes: will Ethereum still be around if its price drops dramatically? Probably. The people who invest in it understand the long-term potential of the network and know that the monetary aspect is just one portion of the entire offering of Ethereum.

Right now, Ethereum network undergoes a lot of changes. It is a work in progress in many ways and was only started in 2015, so there’s no reason to expect perfection as for now. At the same time, these changes could pose existential threats to the Ethereum network. A hard fork occurred in 2016 and several soft forks are slated for the future. They are risky in the same way that a revolution is risky for the government. A lot can go wrong and complex systems are difficult to predict and control.

Is it all about ICOs?

The final thing everyone needs to realize about the price of Ethereum is it is tied heavily to the ICOs being run through the Ethereum network. ICOs (initial coin offerings) are basically just unregulated venture financing, and many of them are carried out using Ether. This is a good thing as long as the ICOs are doing well. The big worry is that similarly to all the companies that went bust during the dotcom crash, many of these ICO-financed companies could go up in flames.

What would this do for Ethereum? It would probably result in it being used a bit less by this segment of the market, and the price of Ether would go down. But there is no reason to believe it would bring about the end of Ethereum. The imagined use cases would still be achievable, although it might take a little longer.

Looking at the potential for a bubble ignores the fact that the only thing which truly matters is the end destination. What the price of Ethereum does in the meantime will not matter as long as the network survives and grows. 

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