Bitcoin: Boom? Bonanza? Bubble? Bust?

With this year’s stellar rise of the price of Bitcoin from a whisker under $US1,000 on January 1 to over $US10,000 at the end of November, just 11 months later, many are questioning whether Bitcoin is a bubble and if the Bitcoin buyers will be burnt when the bubble bursts?

www.visualcapitalist.com

We continue the series looking at cryptocurrencies, blockchains, tangles, bubbles and other interesting concepts like mining, forks and paper wallets.

Disclaimers:

  1. Neither the author nor WhaleOil are Registered or Authorised Financial Advisors and nothing written here should be construed as advice to buy or sell anything.  
  2.  The author owns a few cryptocurrencies, so is likely to be biased.

So what is a bubble?  

Wikipedia says:

An economic bubble […] is trade in an asset at a price or price range that strongly exceeds the asset’s intrinsic value. It could also be described as a situation in which asset prices appear to be based on implausible or inconsistent views about the future. […]

Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, once a sudden drop in prices has occurred. […]

(Seems to be a universal truth in the ‘science’ of economics – accurate ‘predictions’ are made looking back, but I digress.)

There are a few famous bubbles that spring to mind, The Tulip bubble of the 1600’s, the South Sea bubble in the early 1700s, the Roaring Twenties which ended in the Stock Market crash of 1929 and closer to home, the Dot-Com bubble, no, not Kim, the one in 1990s!

You may recall that an earlier post included the phrase, “Bitcoin has no intrinsic worth” so on the Wikipedia definition above Bitcoin is a bubble as the price exceeds its intrinsic value, but that statement held true when Bitcoin was trading at 10 cents in Oct 2010 and no one was calling it a bubble back then.

One key difference is the technology potential. Jean-Philippe Vergne, co-director of the Scotiabank Digital Banking Lab. said, “People often compare bitcoin to a commodity, a security, or a currency, but the inescapable reality is that bitcoin (and other cryptocurrencies) is technology,” he said. “The more developers volunteer time and effort to improve the underlying technology (e.g. software, protocol, network infrastructure), the more valuable cryptocurrencies become.”

Another way to look at the value of Bitcoin is using Metcalfe’s Law which says that a network’s value is proportional to the square of the number of users. For instance, it’s obvious that if you’re the only person with a telephone then that network would have no value, when one additional person gets a phone the network has achieved a tiny bit of value, and if virtually everyone has a phone, then the network becomes extremely valuable.

Stephen Powaga has done the sums comparing the Bitcoin price to the Metcalfe valuation and presented this graph which would indicate that the current price is well below the “bubble” valuation in 2013 and concludes “given the enormous growth that Bitcoin has seen in its user base, the recent price appreciation may not be as “bubbly” as it appears.”

www.advisorperspectives.com

There are plenty of internet articles (here, here, and here) that will present the case for the fact that Bitcoin is a bubble that will crash and burn and others that predict a price of $US40,000 by this time next year.

Is the value “based on implausible … views about the future”?  Given the disruptive technological nature of the blockchain and the growth in the numbers of Bitcoin owners and merchants that will accept Bitcoin, I don’t think so.  

So is Bitcoin a bubble?  I will let the reader decide, but that may be a side issue.

The real question should be, “Are cryptocurrencies the way of the future?”  Postulating, “No” as the answer to that question is a much tougher position to defend.  


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WH is a pale, stale, male who does not believe all the doom and gloom climate nonsense so enjoys generating CO2 that the plants need to grow by driving his MG.

To read my previous articles click on my name in blue.

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