Bubble Bobble

Posted: January 24th, 2018 | Author: | Filed under: cryptocurrency, Investing | No Comments »

Bubble Bobble was a great game! Nearly as much fun as watching the Bitcoin Bubble predictions.

What the heck is a Bubble?

A bubble is an object that has a large volume/surface area with little intrinsic substance. Bubbles can get bigger and bigger…and then they pop.

An economic bubble is trade in an asset at a price or price range that exceeds the asset’s intrinsic value. What the fuck is intrinsic value? Well, that’s where things continue to get murky (and subjective). One uses fundamental analysis or technical analysis to determine intrinsic value. Some “experts” use top-down analysis (what does the industry look like, what are the macroeconomic factors). Others use bottom-up analysis (what are the specifics of the company).

Here’s the thing. There is no consensus on what the intrinsic value of an asset is. Like market analysis, it’s in the eye of the beholder. Some claim Bitcoin’s intrinsic value is zero but why? With no precedent, there is no reasonable way to determine Bitcoin’s intrinsic value.

Bubbles of the Past, Not That Scary

We’ve heard about the big ones – Tulip Mania, Dot-Com Bubble and US Housing Bubble.

Tulip Mania was not the tulip bulbs but Future Contracts on tulip bulbs. Two quotes from the Wikipedia article sum it up for me

“In many ways, the tulip mania was more of a hitherto unknown socio-economic phenomenon than a significant economic crisis”

“Many modern scholars feel that the mania was not as extraordinary as Mackay described and argue that not enough price data are available to prove that a tulip bulb bubble actually occurred”

One of the most famous bubbles may not have been a bubble at all.

The Dot-Com Bubble is a modern bubble many of us lived through. I have a different lesson learned than the masses. It’s not that the market was wrong during the Dot-Com bubble, but it was ahead of its time. The NASDAQ peaked at ~5,100 in February of 2000. It recovered in 2015, fifteen years later and is now ~50% higher than its bubble peak (~7,500). There was a bubble but the market recovered with time.

Bubble recovery

Bubble recovery

The Housing bubble of 2006-2007 took an even shorter time to recover. By 2016, the average US house price was back to the 2006 levels.

Housing Prices

Housing Prices

Argument for a Bitcoin Bubble

  • 1,100% price increase since last year
  • Price increase does not appear to be in step with utilization (hard to say for sure)
  • Adding “Blockchain” to a company’s name or companies launching their own cryptocurrency (see Kodak) are having a (irrational?) run up in their stock price
  • People can buy Bitcoin on credit through exchanges like Coinbase

As far as I can tell, all arguments that Bitcoin is a bubble boil down to the fact that its increased in price “too fast”.

Argument Against a Bitcoin Bubble

  • Bitcoin is special. It’s not a company that can run out of money. It’s not a real-estate market that the government and banks affect. Any comparisons to previous bubbles fall flat due to the uniqueness of Bitcoin
  • Bitcoin is being used as a value-store. The government cannot manipulate Bitcoin through printing more currency (like gold). Gold’s current market cap is $7.8 trillion. Bitcoin’s market cap is under $200 million. That market for a value store is massive.
  • Network effects. The more people who have cryptocurrency the more (intrinsically) valuable it is. The enthusiasm around Bitcoin and its price run up has created momentum. More people have Bitcoin than ever. Products, like wallets, exchanges, payment systems and more have been built around Bitcoin. BTC is the default cryptocurrency used to by other cryptocurrencies. Despite is volatility compared to USD, Bitcoin is considered the “safest” cryptocurrency and many flock to it at times of uncertainty.
  • Macro trends. The world continues to become more connected and more digital. A government controlled fiat currency is not attractive to those in the developing world. A future with separation of Money and State, like the separation of Church and State before it, may be the way to go.

Predicting a Bubble

Like timing the market, predicting a bubble is tough work. Real estate has been around for thousands of years yet most missed the “Big Short” opportunity. The stock market went through the 1929 crash yet the Dot-Com bubble still occurred.

Recently many bears predicted a Venture Capital bubble yet that market continues to be robust. Others have been predicting a US Stock Market bubble for a decade now yet that market continues to grow as well.

Despite having hundreds of years of history with stocks and real estate the “experts” have not been able to predict bubbles. These same experts believe they can predict a bubble in something that has no good precedent to compare it to.

Bottom Line

No one knows if Bitcoin is in a bubble or not and those who say they do are full of shit. Why do people want to claim a Bitcoin Bubble? Are they jealous of those Bitcoin Millionaires? Are they fearful of something they don’t understand? It’s one thing to be bearish on Bitcoin, it’s another to be adamant it’s a bubble.

Bitcoin is Dead. Long live Bitcoin!


Leave a Reply