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Author Topic: Bitcoin is a Bubble: But so what?  (Read 917 times)
sehdal
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January 28, 2014, 07:07:03 PM
 #1

I'm quite curious about this, we seem to constantly hear respected economists saying Bitcoin is a bubble most recently Robert Shiller http://rt.com/business/bitcoin-shiller-bubble-davos-127/

My response is: yes of course but why should we care, that isn't either a very profound or interesting point.

Here's why:

1. Ok because there is a finite amount of the currency there is likely to be a deflationary spiral at some point, since people will become increasingly keen to keep hold of their scarce asset rather than sell it until there is a mass sell off; that's a common economist argument. But I think that is at least decades off and we are still in the early days of the currency. The interesting question is how much more will the value of Bitcoin increase before it bursts?

2. Secondly, and this is perhaps the key point: Financial capitalism is based on unsustainable and periodic bubbles. That's simply the history of financial assets and because Bitcoin is highly volatile its a bubble that has potentially huge gains for the foreseeable future.

3. This is something I am interested in researching further, I don't think Bitcoin is like conventional bubbles because bubbles depend on the character of their members. People hold Bitcoin for financial reasons but they also do for social and political reasons - many have motivations beyond financial profit, which means that as a bubble it is likely to be a fair bit stronger than the debt derivative bubbles that fuel contemporary financial capitalism.

4. We have seen a number of slumps in Bitcoin's value - after the whole business in China most recently. And given some of the government's moves in China we may see another drop in Bitcoin's value this week. However, each time the value of Bitcoin post short term drop is considerably higher than before. So if its a bubble is a pretty strong one, one which when it does deflate slightly is bigger than when it last deflated, and it then expands rapidly again with time.

5. While Bitcoin is likely in the distant but not yet foreseeable future to succumb to a huge deflation; the value of it as an invention is that it shows us that alternative currencies are workable and possible in the global economy without the state. Electronic currencies will continue to expand in variety and form and Bitcoin has blazed a trail that others can and will follow in future.

Also it quite amuses me that when famous economists critique Bitcoin for being a bubble - Krugman most famously - it does no damage to the currency at all, in fact it tends to increase its value. So if someone tells you Bitcoin is a bubble that will eventually deflate, I think we can just say 'so what?' for the above reasons.

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January 28, 2014, 10:53:36 PM
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A lot of people are hurt by bubbles. Just look at the dot-com and housing bubbles. In fact, everyone is hurt by bubbles to some extent because bubbles create economic inefficiencies and wasted effort.

There is no strict definition of a bubble, but one defining characteristic is that a primary factor behind the increasing price is a widespread expectation of an increasing price. Bubbles burst when that expectation goes away.

So, a person (such as Shiller) that considers Bitcoin to be in a bubble believes that expectation of rising prices is the primary factor behind the rise in price. Now, who can argue that most people have not bought bitcoins primarily because they expect the price to rise? He has a very strong argument.

On the other hand, adoption will also drive up prices, and expectation of adoption does not make a bubble, unless perhaps the expectation is unrealistic. So, ultimately the test is whether or not adoption of bitcoin will soon be high enough to support the current price.

I believe that adoption will continue to increase dramatically, so I believe the current price is valid (if not low), and Bitcoin is not in a bubble.

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sehdal
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January 29, 2014, 12:15:35 AM
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Yes I don't disagree with anything there. But that sort of leaves out my point that financial capitalism is based on unsustainable bubbles, that's just what keeps the clock ticking - or the markets rolling. And in financial capitalism as we saw from the financial crisis some win and others lose. Its a feature of capitalism, the only difference is when the banks generate and create huge bubbles that burst they get saved by governments...

Eventually there will be a big drop in Bitcoin's value - because there will be a shortage of liquidity when somewhere close to 21 million Bitcoins are created and people will stop spending and that's characteristic of a bubble. But as I suggested I think that's decades away.

Your point about something not being a bubble due to 'expectation of adoption' and whether it is realistic is interesting. However, that would mean that subprime wasn't a bubble when more and more pension funds and others were investing in them and their asset price was increasing and then suddenly became a bubble when the shit hit the fan and the NINJA loans came to town. So there is a temporal aspect in your definition, which would mean that something isn't a bubble when the price is rising and is a bubble when it bursts.

So I guess you are stepping along the lines of Keynes and animal spirits, when market actors expect the cake to get bigger it gets bigger when they think the cake will get smaller it gets smaller. Capitalism is based on uncertainty and fluctuating expectations and therefore it is based on bubbles, which Bitcoin is a very unusual case of.
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January 29, 2014, 02:26:44 AM
 #4

Ummm its not a bubble.
empoweoqwj
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January 29, 2014, 05:32:19 AM
 #5

Banks and other big financial institutions will spread a lot of FUD about bitcoin being a bubble or a ponzi scheme, because they have their fat cat living on the line.

Just remember, everyone has an agenda.
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January 29, 2014, 05:59:57 AM
 #6

IMO Bitcoin price is in a bubble, but Bitcoin price is also manipulated.
If the manipulators do not crash Bitcoin, the bubble may never burst.
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January 29, 2014, 06:13:39 AM
 #7

IMO Bitcoin price is in a bubble, but Bitcoin price is also manipulated.
If the manipulators do not crash Bitcoin, the bubble may never burst.

That's very true.
And since hopefully most of the users of bitcoin are seasoned veterans
and not idiots... it may never burst indeed.

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January 29, 2014, 07:53:12 AM
 #8

+1, nice article agreed!
guybrushthreepwood
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January 29, 2014, 12:35:56 PM
 #9

I'm quite curious about this, we seem to constantly hear respected economists saying Bitcoin is a bubble most recently Robert Shiller http://rt.com/business/bitcoin-shiller-bubble-davos-127/



But bubbles don't usually bounce back. Bubbles tend to burst and that's it. Bitcoin has rebounded 4 times and got stronger nearly everytime.

bitbitz
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January 29, 2014, 01:27:21 PM
 #10

yolo!

Who cares"? Its fun! hahah
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January 29, 2014, 02:24:24 PM
 #11

I'm quite curious about this, we seem to constantly hear respected economists saying Bitcoin is a bubble most recently Robert Shiller http://rt.com/business/bitcoin-shiller-bubble-davos-127/



But bubbles don't usually bounce back. Bubbles tend to burst and that's it. Bitcoin has rebounded 4 times and got stronger nearly everytime.

Exactly. Smiley
When bitcoin price was ~$60 back in early 2013, people already called bitcoin a bubble. Smiley
act now
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January 29, 2014, 02:43:04 PM
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Bitcoin is a great representative of "What does not kill us - makes us stronger" Smiley It is not a bubble of any kind.
bitgeek
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January 29, 2014, 03:42:22 PM
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You're wrong it's not a bubble. I recommend watching explanatory vids on yt.


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sehdal
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January 29, 2014, 04:32:21 PM
 #14

This is of course a matter of opinion, so its good to hear substantive arguments and positions on both sides.

Iv'e seen lots of explanatory vids on youtube. If you have a link to a specific one that addresses this issue then please provide a link.
KonstantinosM
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January 29, 2014, 04:40:17 PM
 #15

Whether or not bitcoin is a bubble is a point of view.

Bitcoin has proven very useful, if for some reason it becomes useless its value will drop to 0.

So if BTC is useful, it is not a bubble. That is not to say that it is not deflationary.

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January 30, 2014, 04:25:54 AM
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The adoption by online retailer proves its utility. Whether the current price is "too high" and a speculative bubble, only time will tell.
SomeoneInNeed
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January 30, 2014, 07:11:10 AM
 #17

Yes, Bitcoin is a bubble. I would recommend that we make make the most out of it before it bursts.

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January 30, 2014, 08:46:04 AM
 #18

Bubble that will never explode Smiley

Cryptos are coming! Beware.
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