Cryptocurrency is currently in the silly phase of bubble. It looks exactly like the peak of dot.com mania. A crash is coming fairly soon. My top end estimate for time remaining would be a year, but I'd warn anyone contemplating a shorting strategy that bubbles have a way of going far higher than anyone can predict. Many people lost serious money trying to short dot.com and housing. Still we are definitely in the fragile tail end and the crash could come literally any second now.

I lived through dot.com and housing mania and I'm having serious deja moo right now. Deja moo is when you've seen this bull before. On a recent flight I saw a long format in-flight advertising video for DASH, an altcoin. I repeat: airline advertisements! If you still have doubts that we are in gibbering flapdoodle land, head over to YouTube:

https://www.youtube.com/watch?v=hXRhIXp4idM

We have celebrity endorsements and music videos. Run away.

I think the crash is going to look a lot like a bank run. There will be some piece of news that triggers it (exchange collapse, policy change, who knows) and then everyone will scramble to cash out. It will quickly become obvious that there is insufficient USD/EUR/etc. on hand to actually back the current market cap of the top ten coins. At that point exchanges will halt trading. Lawsuits will be filed. Exchanges will go into receivership. More lawsuits will be filed. Criminal charges may start getting filed. You get the picture.

Most of the crime and financial fraud that will happen in this bubble is happening now or will happen during the crash itself. Most financial fraud is driven by frantic attempts to cover one's ass. My guess is that top people at all the exchanges know they are in serious trouble and there are many frantic meetings going on debating what can possibly be done. Since a bubble is basically a naturally occurring emergent Ponzi scheme, the only way "out" is to get more dumb money in so smart money can exit... hence the airline advertisements and Facebook ads to buy coins. I am currently seeing a lot of the latter.

Sadly a lot of naive people will lose tons of money. People have been dumping their life savings and mortgaging their houses to get into this. It could have follow-on effects on the economy. Some of the big Bitcoin exchanges are privately insured, so I wonder if it could drag down a few insurance companies. The rest of the economy is fragile so it's not impossible that this could trigger a recession.

Cryptocurrency will not go away post-crash any more than the Internet went away post dot.com crash. We're just approaching the irrational exuberance peak of the new technology adoption hype cycle.

After the crash it will go back to being a semi-underground niche thing for a while. Valuations will return to sanity. Those exchanges and other businesses that do survive will gain a lot of experience and a reputation for stability. Ironically sometimes the best technical work gets done post-crash, so I wonder if after the crash we will finally see useful applications built on this tech beyond its core currency use case.

If you really believe in the long term promise of this technology, after the crash would be the time to buy in.

P.S.

I really wish high schools would teach a class on finance, and if they did it should include a lesson on bubbles and a study of a few recent ones like dot.com and housing. People should be educated about what a bubble looks like and how to avoid getting ruined by one.

It wouldn't stop everyone. The allure of herd behavior and gambling is strong. But it would save a few folks from losing their life's savings.