[2017-09-13] Bitcoin is in a bubble, and here's how it's going to crash

[Eric Cartman]

Can bitcoin be a transformational, technology-based, currency and be in a bubble at the same time? Uh, yeah!

JPMorgan Chase CEO Jamie Dimon created a bit of a stir in the market for bitcoin on Tuesday by claiming the cryptocurrency is a fraud and is in a valuation bubble that will burst. He said he'd fire any employee in his trading division who speculates in that currency market.

Critics say Dimon is just protecting his entrenched financial market turf, while others, like myself, voiced their agreement with his core premise.

There is so much to "unpack" when it comes to discussing transformational, or disruptive, technologies that have become highly speculative that it's hard to compress it into a mere 750 words or so. But here goes:

Most disruptive developments in technology and finance eventually inflate into speculative bubbles as investors and traders assume that the intrinsic value of these new vehicles will expand forever.

The "Tulip Mania" in Holland in the 1630s to which Dimon alluded notwithstanding, history is replete with examples of how transformational technologies enter a highly speculative phase, leading to the creation of great riches for early investors but great risks for those who arrive at the party far too late.

Here, one looks back to history to identify the various and sundry bubbles that brought both great risks and rewards to investors and suckers alike!

The exploration of the New World led to the catastrophic "South Sea Bubble" in Great Britain in the 18th century, along with the "Mississippi Scheme" in France at roughly the same time.

Isaac Newton lost a fortune in the former while the French government nearly collapsed in the latter.

Of more domestic vintage, turnpike and canal bonds were the subject of great speculation in early American history. So were railroad bonds, electric utility stocks, auto companies, radio firms, the electronics industry, color TV companies, Japanese conglomerates, computer, biotech, internet shares and real estate, and all crashed when excessive optimism far outweighed the more rational expectations normally associated with prudent investing.

So too will be the case with bitcoin.

The price of a single bitcoin has gone up parabolically and at a faster pace than any other speculative vehicle in market history, as investor enthusiasm for the new medium has reached a fever pitch.

However, its adoption as a global currency is suspect, partly for regulatory reasons and partly because creating a world currency from scratch, especially given the mandatory limitations on bitcoin creation, is no mean feat.

There have been only three reserve currencies in the history of the Western World: the British pound, the French franc (however briefly) and the U.S. dollar.

Today, the dollar accounts for roughly two-thirds of all financial and economic transactions globally. The daily value of foreign exchange trading tops $5 trillion, alone, while bitcoin does a mere fraction of that.

As yet, bitcoin also fails as a currency in several ways. Money is defined by three characteristics:

A storehouse of value.
A unit of account.
A medium of exchange.
It's hard to determine if bitcoin is a storehouse of value. Daily volatility tops 5 percent to 10 percent while its "value" has skyrocketed. If it crashes, it will fail to meet criteria No. 1.

It is a unit of account, but for whom?

It may be a medium of exchange, but for now that is only for a very few users.

Convertibility is suspect in some nations where bitcoin exchanges have been banned, creating some confusion as to how the currency can be used.

Complicating all that is the use of cryptocurrencies in the "dark web" for a wide variety of illicit activities, from money laundering to drug dealing to prostitution, among others.

Additional issues involve sovereign nations and their desire to maintain control of their respective currencies and money supplies that make widespread use of bitcoin unlikely in the very near term.

I've studied bubbles, written extensively about them and have covered no shortage of speculative events in my 33-year career.

Bitcoin is in a bubble, make no mistake. The episode, for some, will end badly while others reap the rewards of getting in on the action early and, more importantly, getting out before the bust.

But as in the case of many prior breakthrough technologies, the transformation will indeed be disruptive and extremely important even if the first mover fails to survive.

The two, as history has shown, are not at all mutually exclusive.

https://www.cnbc.com/2017/09/13/bitcoin-is-in-a-bubble-and-heres-how-its-going-to-crash-ron-insana.html

[1Referee]

Back in the days, Bitcoin was said to be in a massive bubble, where if it would reach $100 for the first ever time, this market was done and over. This was coming from certain high positioned financial institution donkeys. Currently, we're basically in the same situation - if this means that we once again will go through a massive bull run in the forthcoming years, then I'm perfectly fine with more lunatics calling Bitcoin's market a bubble. If we look at how many times Bitcoin has been stated to be in a massive bubble throughout the years, this certainly must be a never ending bubble. In some way I can understand this gibberish coming from financial institutions - at the end of the day, Bitcoin makes banks obsolete.

[d5000]

I somewhat agree with the author, although I'm a bit less pessimistic about the outcome of the current "bubble" (or "overheating").

We will never see again such ultra parabolic bubbles like in 2013 - but also we will never see such dramatic crashes like that year, or like in 2014 when Mt.Gox collapsed. I don't think we'll (sustainably) see <$1000 prices again, if nothing catastrophic happens.

Volatility is declining a bit because of increased liquidity and more marketplaces, as Bitcoin is spreading around the world and traded against more and more currencies. But in this point I also agree a bit with the author: It [volatility] is decreasing less than it should. Bitcoin still isn't really an unit of account. I think the Bitcoin community should really try to find mechanisms how to further strengthen stability and avoid boom bust cycles.

The problem is: while speculation is the main use case for Bitcoin, volatility won't change that fast.

[cr1776]

I remember the same type saying it was a bubble, tulips, ponzis, a scam at $0.10, dollar parity (this in particular), $10, $30 etc.  Sucks for them.

[Carlton Banks]

It's hard to determine if bitcoin is a storehouse of value. Daily volatility tops 5 percent to 10 percent while its "value" has skyrocketed. If it crashes, it will fail to meet criteria No. 1.

People who have only just become interested will always bite on this one, but here's the rub: the author of this article forgot to include the words "long term" in his definition of this characteristic (and clearly knows less about financial market then they purport to).


Central bank issued currencies also fluctuate in market value a great deal, comparing Bitcoin to the USD conveniently ignores the fact that Bitcoin has performed a great deal better as a store of value than a huge number of national currencies throughout it's existence, which is why Bitcoin found popularity all over the world with the citizens of those countries whose currencies have slid or collapsed.

Daily volatility in many currencies would have significant effects on businesses trading in those economies, but anti-capitalist laws prevent the true effects of exchange rate fluctuations from being felt in actual consumer market places. If government-backed (read: violence backed) currencies were such powerfully, trustworthy mediums of exchange, there would be no need for authoritarian intervention in their street value.

The reason fiat currencies are so fragile is that real capitalists understand the truth about fiat currency: it's only value is in self-preservation, for government and neo-serfs alike. Government needs fiat to keep their Central Bank racketeers happy, and the proles need fiat to protect them from government theft and violence. Until Satoshi came along, and mixed bittorrent with real capitalism, lol

It is a unit of account, but for whom?

Real capitalists.

It may be a medium of exchange, but for now that is only for a very few users.

And that number just continues to increase. It won't take a huge percentage of the world's population to convert to regular Bitcoin holding and use before it really puts a dent in the viability of this joke clown marionette of capitalism that the government/corporate cartel desperately tries to sell to us through CNBC and the like on a daily basis.

And real people will act in their real self-interest, there is nothing that can be done to stop this. Capitalism is more powerful than planned economies for precisely this reason. So this system will eventually fail, and here's how it's going to crash: governments and central banks, in their arrogance, will assume, as usual, that their interference is what will solve the ever worsening state of their planned economies. And the more they interfere, the more the spiral of the vortex will tighten around them. They will finally realise that it was because of how little they interfered in peoples economic lives that prosperity existed, and not in spite of it.

[karmakeddon]

Bitcoin, as with other commodities will always have its rise and fall. Right now we have seen it go up as high as $5000 and nowadays falling below the price of $4000. It's comparable to other commodities like oil or gold who have experienced some rise and fall like bitcoin as well. Since bitcoin is accepted by well known merchants now, it will go back up in price again.