Article: the Bitcoin Bubble

[ploum]

Just posted an article about the bitcoin bubble and its possible outcomes:
http://ploum.net/post/bitcoin-bubble

The article, that will be published on planet.gnome.org and planet.ubuntu.com, is under CC By license (but there's an address for donations if you appreciate it)

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[BitterTea]

It doesn't seem right to me, to call it a bubble.

An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values”.

In finance, intrinsic value refers to the value of a security which is intrinsic to or contained in the security itself. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value.

Does Bitcoin have intrinsic value, in the financial sense? I don't think so.

The other main issue I have with the article is your three possible scenarios. Cosmological ideas don't make very good analogies for markets. There is nothing "infinite" about the idea that due to supply and demand, the price of Bitcoin could be much higher than it is today. Here are a better three possible scenarios:

• It goes up
• It goes down
• It stays the same

[caveden]

Nothing has intrinsic value. Value is not an intrinsic attribute of anything. Value is on the beholder.

And please, realize it's impossible to determine whether the price of bitcoins is overestimated or not.

I don't think this is a bubble, as the housing or internet bubble, since I don't see people getting loans in highly inflated currencies to buy bitcoins. What creates bubbles is easy credit created by inflation.

There's definitely a lot of speculation going on, and bad speculators tend to provoke more price variation than what would happen without them. So, yes, if a lot of bad speculators are putting their money in bitcoins, that could result in a lot more turbulence. But still, I would be careful before calling it a bubble.

[Raulo]

I don't think this is a bubble, as the housing or internet bubble, since I don't see people getting loans in highly inflated currencies to buy bitcoins. What creates bubbles is easy credit created by inflation.

No. Easy credit helps in creating large high-impact bubbles but a bubble can happen with just irrational exuberance. There were several bubbles with zero credit involvement.
Baseball card bubble:
http://www.slate.com/id/2247677/
Beanie babies:
http://seattletimes.nwsource.com/html/businesstechnology/2002020751_beaniebabybubble31.html
and many others.

Bitcoin could be no different.

[The Script]

Also, the tulip bubble from way back when dinosaurs, black and white TV and floppy discs ruled the earth. 

[ploum]

Also, the tulip bubble from way back when dinosaurs, black and white TV and floppy discs ruled the earth. 

The tulip bubble is a good example as the tulip bulbs were overestimated (in the 10000 factor). What was worst was the fact that some bulbs were sold before existing at all. It could happen if people start to buy bitcoin that are not mined yet.

But today, tulip bulbs still exist and they still have a value. You can buy them and sell them.

[Timo Y]

Nothing has intrinsic value. Value is not an intrinsic attribute of anything. Value is on the beholder.

Evolved currencies do have two distinct types of value though, exchange value and non-currency value.  They were traded for their non-currency uses before they became currencies.  That places a limit on how far they can fall when people stop trusting them as currencies.

For a designed currency like Bitcoin that lower limit is close to zero.

Perhaps Bitcoins do have some value apart from exchange value, like novelty and collectability, but that value is negligible compared to the current market valuation.

When people start "abusing" the main chain for non-monetary transactions such as DNS assignments, and a thousand other creative uses that we can't even imagine right now, then Bitcoin will start gaining substantial non-currency value too.

[caveden]

Also, the tulip bubble from way back when dinosaurs, black and white TV and floppy discs ruled the earth. 

The tulip bubble was also caused by inflation and cheap credit. The difference was that the inflation source was not a central bank, but the enormous theft of gold and silver promoted by Spanish conquerors in south america.

[Lemmih]

The infinite expansion

That's why die-hard bitcoin fans are expecting.

Should probably say 'what' instead of 'why'. Unless bitcoins can somehow impregnate people over the internet, of course.

[no to the gold cult]

I don't think this is a bubble, as the housing or internet bubble, since I don't see people getting loans in highly inflated currencies to buy bitcoins. What creates bubbles is easy credit created by inflation.

No. Easy credit helps in creating large high-impact bubbles but a bubble can happen with just irrational exuberance. There were several bubbles with zero credit involvement.
Baseball card bubble:
http://www.slate.com/id/2247677/
Beanie babies:
http://seattletimes.nwsource.com/html/businesstechnology/2002020751_beaniebabybubble31.html
and many others.

Bitcoin could be no different.

I disagree. In both the cases you quoted, though interesting... supply was open ended and essentially at the whim of the producers. Bitcoin is very specifically not the same.

[no to the gold cult]

Nothing has intrinsic value. Value is not an intrinsic attribute of anything. Value is on the beholder.

Evolved currencies do have two distinct types of value though, exchange value and non-currency value.  They were traded for their non-currency uses before they became currencies.  That places a limit on how far they can fall when people stop trusting them as currencies.

For a designed currency like Bitcoin that lower limit is close to zero.

Perhaps Bitcoins do have some value apart from exchange value, like novelty and collectability, but that value is negligible compared to the current market valuation.

When people start "abusing" the main chain for non-monetary transactions such as DNS assignments, and a thousand other creative uses that we can't even imagine right now, then Bitcoin will start gaining substantial non-currency value too.

bitcoins only value, in my opinion, is as a store of value. It's perfectly suited to it's purpose, nothing more and nothing less than that.

[Anonymous]

Nothing has intrinsic value. Value is not an intrinsic attribute of anything. Value is on the beholder.

Evolved currencies do have two distinct types of value though, exchange value and non-currency value.  They were traded for their non-currency uses before they became currencies.  That places a limit on how far they can fall when people stop trusting them as currencies.

For a designed currency like Bitcoin that lower limit is close to zero.

Perhaps Bitcoins do have some value apart from exchange value, like novelty and collectability, but that value is negligible compared to the current market valuation.

When people start "abusing" the main chain for non-monetary transactions such as DNS assignments, and a thousand other creative uses that we can't even imagine right now, then Bitcoin will start gaining substantial non-currency value too.

I dont think this will happen. Its already accepted that there will be separate chains and you will have multi miners so all the network hashing power mines on all the chains at the same time.

[Raulo]

I disagree. In both the cases you quoted, though interesting... supply was open ended and essentially at the whim of the producers. Bitcoin is very specifically not the same.

You essentially  strengthen my argument because even if non-constant-supply stuff can have a bubble, Bitcoin can have it much easier. "They are not making land any more" was the housing bubble main argument.

But there are other examples. There was a bubble in historic coins and stamps which after minting/printing have constant (or falling due to loss) supply (these cards or dolls were also finite supply after producing one series)

Face it. Bubbles are created by human greed and may only be enhanced by cheap credit but the root cause is the human nature itself.

[zby]

Just a crazy thought: Ebay bought PayPal for $1.5 billion - if we make bitcoin a kind of alternative to PayPal it should not be worth less than that.  For 6 millions BTC - this would mean about $200 per BTC.  The problem is that there is really long way to make bitcoin usable for the average Internet user and I don't even know if that is feasible at all.  On the other hand the PayPal valuation did not include the money stored in PayPal.