This year has been absolutely crazy regarding crypto currencies, many times seeing the big names rally by 30 40% in a day. Obviously, that is pure speculation or market manipulation (although I am not sure if this could be the case with crypto currencies, because I still could not understand the technology 100%). The problem with bubbles is that you never know when they are going to end, if you catch them young you are in for a wild ride and a lot of money, if you don't, well, you helped someone else get rich. You see, a crypto currency does not yield anything, it is not an asset, so whatever you lose is simply money transferred to other individuals, because with a non productive asset you can't afford to go in at the wrong time.
The problem with bitcoin and cryptos is not that the technology isn't great, it is indeed a game changer, but so was the internet back in the 90's, and look what happened to those companies. The mania in crypto resembles the dot com bubble in many ways, but of course people don't learn much from the past; another way of looking at it is that the people involved in crypto are not the same ones, this is a completely new generation. I strongly believe that most of the people that have been riding this rally have not been the professionals, and merely amateurs that wanted a piece of the action. If you are serious about investing, no matter how strongly you feel about something, and you have been involved in bitcoin from the beginning, you are mostly certain out of the game by now, because you have seen this picture before. Another strong resemblance with the 90's, besides the amateurs that think they know something others don't, is the vast number of new ICOs going on. I am not going to analyse the legality or shall I say the quality of the new coins getting created because frankly I have no idea, but ICOs create supply in the crypto market, and as we know, when supply increases faster than demand... Obviously this doesn't matter to the people involved right now, but remember that if people don't understand a simple function of the market, , then they certainly do not have a lot of cash on their hands, and when the cash runs out, then we'll see the crash of crashes. Remember, bitcoin's market value is the same as a very large cap corporation! Only one! So for example on the 7th of December, the buying climax day, the value of bitcoins exchanged on the Coinbase exchange was only around 1.3 billion. Now you could argue that when the institutional players start getting in, the value will rise dramatically. NOPE! The real players are not going to get in at this extreme price, after a hyperbolic rise. It all depends on the pockets of amateurs, and although amateurs are great at the beginning, they have shallow pockets and they get scared quickly (in less than a week bitcoin lost almost 50% of value).
All the explanation was done on the chart because I was running out of space. Please feel free to comment and to tell me why I might be wrong.
I believe that the picture for bitcoin is surely going to get ugly. I've been wrong before on this one. I hope I am not this time. Happy new year!
Lets see if the bubble is really going to burst and take Bitcoin to 1000
As for the valuation models, the key differentiators that put cryptocurrency in an entirely new asset/commodity class is primarily based on two key aspects of this technology. The first being the fact that it functions as a currency, and two, it is the only type of currency that is truly borderless. The fact that its a currency, and a driver of economic activity, doesn't allow for a direct correlation to the dot com bubble (and especially not the tulip bubble, lol). The dot com bubble was based on actors inside and economic environment; where in the actors are not drivers of the economy itself. Additionally, because its a borderless currency, the first ever of its kind on this planet, the direct correlation to currency models that exist today also cannot be made. Market penetration takes on a whole new context.
Until this tech gets through several phases of disruption in the economies of the world, the only real basis that can be used to assign quantitative value of the network(s) are the number of users, nodes, and channels (in the case of the Lightning Network) that the network has and is adding. Its a user based system, a distinct qualitative difference between other forms of currency. Correlating rise in price to number of user, nodes, channels, etc, that are added is a way to begin getting a sense of the actual driving force behind the increase in value. Outside that, it really is only speculation, even if its done through technical analysis of charts -- the bots rule that world of inflating value metrics.
I do agree with what you said, regarding the comparison with the dot com bubble. However, even if the number of users, nodes, channels increase, why do we have such a big appreciation if not for pure speculation? Currencies fluctuate for many reasons (of course the fluctuation band rarely exceeds 15-20% YoY for the majors), one of them being the yield they produce via investments in different economic assets or, as is the case with the yen and chf for example, the economic shield they offer. Bitcoin and other cryptos do not work with this economic model, so why do we see such a rapid increase in value? If not for speculation, then what is the main driver for such high prices?