Disclaimer: this is not investment advice.

According to a recent interview with Jeremy Liew, there are up to 6.5 million bitcoin users in the world today. If the value of bitcoin continues to grow at an exponential rate, and it becomes a mainstream technology, we could be at a comparable moment in internet adoption years to 1993.
​
6.5 million users translates to about 0.093 % of the world population. Jeremy believes that we have already seen 54x growth and the same growth again would lead to a value of $500,000. In the chart below I have simply multiplied the cumulative rate of internet user growth from 1994-2006 by the value of one bitcoin today. The number that you end up with is about $168,000. 

 Picture
A recent study from Cambridge has highlighted a 50% average annual growth rate in users since 2013. If the price continued to track this growth rate you would get to $194,000 by 2030. If you see a multi-chain future, you could combine value of the top 50 or 100 coins by market cap and track the overall growth from now. There is currently no widely used index that offers this today.
​
 Picture
The price of bitcoin has fluctuated wildly to date but each cycle has yet to include a significant portion of the public. If this changes in the next cycle, is there a way to prevent the fallout that is commonly associated with cyclical bubbles of speculative investment?
 Picture
Src: https://site.warrington.ufl.edu/ritter/files/2017/03/IPOs2016Statistics_Mar29_2017.pdf

It has been well documented that tech companies have remained private for longer to avoid the scrutiny, short term earnings pressure and regulatory burden that comes with public markets. Retail investors have been left out of the high growth stages that previous generations enjoyed with the likes of Apple, Intel, Microsoft and Dell. We can also see from the above chart that the last year for 100+ tech IPO’s was 2000. A latent demand has been building for high risk, fast growth, early stage technology stocks. Bitcoin and Altcoins may have opened this door again, after 15 years.  Brock Pierce discusses this transition in more detail on a recent Crypto Show episode.

Valuation metrics

People value bitcoin and cryptocurrencies in many different ways. I won't list them all, but between Coingecko.com, coinmarketcap.com and Blockchain.info you will find most of the main ones. As the Bitcoin protocol is just 8 years old, it's not clear yet what objective values people will broadly agree on in the long term. My interview with Vinny Lingham revealed that the price to mine a coin is his primary metric, among others. Dan Morehead of Pantera Capital believes that transactions per day is the best model to use. ​
 Picture
And yet we know from the exchanges that an increasing number of transactions occur off-chain. We can’t even be sure if the user numbers in the first two charts in this article are reliable.

Bubbles occur in well established markets when a large portion of investors depart from historical valuation methods. In the dot com bubble, focus shifted from profit to eyeballs. In the housing bubble from yields to leveraged capital appreciation.

Dot Com Lessons - Bubble indicators 
​

1.Rapid price appreciation

Apart from 1996, the first chart above shows steady, but slowing growth of internet users each year from then onwards. Contrast this with 3x growth in Nasdaq composite index from 1600 in aug 1998 to 5000+ March 2000. The value of the Nasdaq was growing exponentially, as the user base growth rate was slowing.  

In the short history of bitcoin we have regularly seen the price depart from user/transaction growth levels. Very rapid price appreciation has been a precursor to crashes in both bitcoin and the Nasdaq. For instance, in the last two bitcoin bubbles, once the price doubled within a month you could start your timer.  There was a 40% or more crash coming within 30 days.

2.Media endorsements

During the dot com bubble, a number of mainstream articles encouraged retail investors to get involved in the late 1990’s. Smartmoney magazine predicted AOL was a sure thing in 1999.
In the cryptocurrency world we have had a number of endorsements from mainstream media. This article contains many worrying elements such as blockchain hype, ‘getting in early’ and descriptions of small companies in the space as ‘penny stocks’. For the time being though, there remains a balance of cautionary warnings as well. Bitcoin has died 100+ times.  Many mainstream economists have been consistently dismissive of it. The tide has not yet swung into widespread FOMO yet. I suspect if certain prominent naysayers change their opinion, this might begin the swing.

3.Exponential growth predictions

There is no shortage of these in bitcoin. From Wences Cesares, Rick Falkvinge, Jeremy Liew and Tim Draper. I am aware that even writing something like this can contribute to FOMO. I can safely say that don't know where the price is going.

4. Mobile wallets become as easy to use as Netscape

Mobi wallet from BTCC already makes it easy to buy and sell bitcoin in any currency. I suspect that this or another wallet will eventually catch on and lead to much wider adoption. Whether we need to wait till 2019 as per Willy Woo’s volatility prediction remains to be seen.

5.New Narratives 

In the 1990’s we had eyeball mania, today it's the altcoin/blockchain hype. Whether this is the narrative that carries into the mainstream bubble, or something else about central bank bailouts, disrupting Wall street, the IoT or some other buzz word also remains to be seen.

What the bubble got right

In his article entitled ‘What the Bubble got Right’ Paul Graham has noted that the beginnings of the dot com bubble were rooted in rational thinking. The internet really was a big deal. The crash occurred because it took much longer than people expected to disrupt incumbents. ​
 Picture
The consensus among prominent technologists, with a strong record outside Bitcoin is that it really is a breakthrough technology. Misguided Euphoria emerges when people forget that it may take 30 years for the full value to be realised. Willy Woo has touched on this in his article Woo’s law of bitcoin user growth. Suffice to say that very few people think on this long term time horizon when it comes to something that is appreciating rapidly in value.

So when can we expect the next boom to happen?

Based on Bitcoin's short history, is not unreasonable to expect another bubble to grow and pop in the next 2 years but it may not be ‘the big one’ that involves people with no technical or even basic understanding of the protocol. If and when it comes, we may see some or all of the following:

1. The storage scammers - Mom and Pop investors struggle to understand how to store their bitcoins. There will be no shortage of fake hardware, cold storage, and hot wallet scams to take their money.

 2. More hacked exchanges - Even legitimate exchanges will come under much more pressure from sophisticated hackers. Many new investors won't have even heard of Mt Gox and will happily leave their fiat money and bitcoin in exchanges.

 3. ICO scams - It hasn’t been hard to sell some technical people on the idea that bitcoin is old news and they are about to miss out on the latest coin/token offering. Imagine a scenario where 1000’s of tokens have launched on the Ethereum Blockchain and it suddenly ceases to function for some unforeseeable reason.

 4. Other tech gets pulled into ‘blockchain’ - ICO’s for VR, AI, Drones, Autonomous Vehicles ramp excitement up to another level.

 5. Taylor Swift ICO’s an album - This is the peak.

The aftermath - Regulation

After the dot com bubble, greater regulation followed soon afterwards and this time will probably be no different. It will become harder to invest in bitcoin without getting advice first and the government will most likely track and regulate industry practices much more carefully.

Can this be prevented?

Due to the enormous latent demand for early stage tech investment, the new narratives, high growth predictions, lack of regulation and long history of speculative cycles, I don’t think that it can be stopped. For novice investors, it is only through individual psychological tricks that you can prevent FEAR and FOMO. Here are a few that have worked in the past.

Making it hard to over-invest at the peak of a cycle or sell at the bottom of one.

Bitcoin Pensions - Government regulated pensions essentially incentivise delayed returns and punish those who withdraw early. This would protect those who don't have the expertise to assess the short term risk.  An ETF would probably be needed for this to happen on a wider scale.

CheckLockTimeVerify or CLTV. Merged into Bitcoin Core in 2015, this feature should in theory allow parents to create a trust for their kids or savers to restrict their own ability to sell in a panic. As of yet, no service or wallet has integrated and promoted it in a meaningful way. Tom Nguyen has implemented a version of this using Solidity.

Leverage - Ensure leverage is hard to get in relation to bitcoin. I don’t think there is a practical way to prevent this. The market will demand it and ultimately it will be probably be limited in government regulatory crackdown on Wallets and Exchanges.

Savings schemes In the 1990’s in Ireland, the SSIA savings scheme allowed consumers to get a very high rate of return on their saved cash by putting it into a government backed high interest scheme for at least 5 years. This was an attempt to try to incentivise them to save during the property boom. The problem was that the money was released in 2007 at the height of the boom which exacerbated to problem. The potential for this to work in bitcoin is probably limited given the untested nature of bitcoin and the potential reputational damage for politicians who get this wrong.

Examinations for advisors. So many people fall down on the basic facts of the protocol that it would be a useful starting point if you want to advise new entrants to the market on bitcoin/blockchain investment.  Post ‘big crash’ this will be imposed anyway so it's no harm to get ahead of them and create something that the community can discuss. 

Public Index Fund for total Cryptocurrency Market Cap

This will of course fluctuate but might save individuals from trying to bet on what the ‘next bitcoin’ will be. For more data on this check out this post by none other than Willy Woo. A number of index funds are in the pipeline as of today's date.

Split your coins into 2 separate pots

One that you will never sell and can afford to lose. I actually use 3 pots as explained in this article.

Conclusion

Bitcoin has grown in hype cycles to date. There is no reason to expect this to change. Bubbles and crashes may serve some useful functions. They weed out the temporary speculators or ‘weak hands’. They force the industry to create new standards around the mistakes of the last cycle. They expose false narratives and cracks in the system. The incentives to self-regulate do not exist until these cracks are exposed. There are probably lots of unexposed cracks in the system at the moment. If the damage radius gets wide enough to affect unsophisticated investors, regulation will come in from the outside.

The next crash may also have the unintended consequence of solving the scaling debate. A subsequent crash and trough may lead to a better environment for compromise in that miners fees will be relatively lower again. Alternatively, exchanges may route around the problem with off chain scaling solutions as suggested by Jimmy Song.

That is all. https://twitter.com/btcbehaviour