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.
