Why the question "Is Bitcoin in a bubble?" is not the right question to ask.

Yossif's picture
Rank: Senior Orangutan | 422

I was talking to friends recently and though they love Bitcoin and the blockchain, they think Bitcoin is in a bubble. I don't think that's really a relevant statement. The prices of Bitcoin are extremely high, probably due to a lot of speculation, but at the same time that does not mean it's in a bubble.

The reason my friends think it is a bubble is, because prices are high, people are speculating people could at any moment lose hope in it, and since it isn't backed by any other asset, or trade, the Bitcoin would then fall. I find that the opposite is true. Something that is in a bubble usually is in one, because either people realize that the underlying thing that determines value of something else (think real estate and houses in mortgage backed securities, or .Com companies and their stock) is misrepresented, or institutions default. Bitcoin is not backed by anything besides a blockchain and the fact that people view it as a storage of value like gold. No entity can default in a way that causes the value of blockchain to decline.

This means that the only way blockchain would lose its value is if there is a general recession and people needed liquidity. However, since blockchain is viewed as a storage of value, the part of the community, which views it as one, would cause the price to stabilize, if not go up, in the same way as gold goes up in a recession.

Do you agree? Could Bitcoin even be a hedge against a recession? Do you think the price of bitcoin is going to fall? Either way, where do you think it will stabilize?

Comments (35)

Nov 3, 2017

Hey Yossif, I'm the WSO Monkey Bot and I am sad to say, but this thread is lonely, so thought I'd post in here to try and help out. Some potential topics that might help:

Who will rescue this thread? @fhkeimf @Nutry @Revsly

Fingers crossed that one of those helps you.

    • 3
Nov 15, 2017

I recently started investing in cryptocurrencies, but not Bitcoin. When Bitcoin did reach >$7K range, I thought it was a bubble as well and the prices will drop. Last weekend was full of drama with its segwit2x being cancelled and investors/speculators panicked and sold off Bitcoin. It dropped nearly more than $1000 but rebounded back today. I do believe that as Bitcoin and Altcoins attracts more massive audience, it will create a true "bubble." I believe it is still in a stage building up to it.

Anyone else investing in Altcoins?

Nov 15, 2017

I also agree that it is still building up to it! I think what is really interesting is the bitcoin forks creating new altcoins. I am not sure what altcoin to chose, besides maybe etherium, or ripple.

    • 1
Nov 15, 2017

I have my money on Litecoin, Ethereum, and Ripple as well. Studying about Ripple made me want to invest in it: 1). It wants to help bank transfers faster and at almost no transfer fees 2)Major banks such as MUFG and Japanese regional banks are already trying it out 3)You can't mine XRPs like Bitcoin and other coins.

The creators of Ripple have taken defensive "pump and dump" measures by locking away their extra XRPs until more are needed after it gets implemented by more banks and entities.

It it also 4th highest market cap after Bitcoin Cash. Litecoin is 5th. People are saying Litecoin is undervalued due to their market cap size and trading volume. It should be able to break out from the $60 range to $80 by end of this year or next year.

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Nov 15, 2017

Would you also consider the Tulip Bulb Craze to not be a bubble?

Nov 15, 2017

I think that Tulips weren't considered a storage of value, considering they weren't as finite and they don't last. They were much more speculative. I think bitcoin might be in a bubble but that does not mean prices can't stabilize at a reasonable level such as a few thousand dollars.

Best Response
Nov 15, 2017

bitcoin's meteoric rise is built on faith, not fundamentals. any asset without a claim on a series of cash flows (like stocks, bonds, or real estate) or a claim on a hard asset (like land, gold, agricultural products, etc.) has not had a favorable existence.

bitcoin will probably go up bigly from here, it's not in bubble territory yet, but the party will stop at some point and it won't come back to where it is.

whereas I think blockchain has a great potential future particularly in private blockchains.

    • 4
Nov 15, 2017

I agree that blockchain has great potential, as do most people.

If you think Bitcoin is not in bubble territory yet, why do you think when the party stops it wont come back to where it is? I.e. if its not in bubble territory yet, should it not stabilize at around the current price?

Nov 16, 2017

bubbles aren't simply a rocketing up in price, there's a psychological element to it. I think it will become a bubble once SEC-registered securities begin tracking it which will happen soon once futures launch along with the subsequent ETFs.

in the housing bubble, you started seeing irrational behavior as early as 2003-2005, in the tech bubble, things started looking wonky as early as 1996. just because something is overvalued doesn't mean it can't go higher, and I think it's the same with bitcoin. it's a foolish investment, sure, but it's also unreasonable to think it can't go higher before it crashes.

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Nov 26, 2017

Spot on. I'd also consider the impact on regulation as being the big push to bubble status. Personally, I prefer hard assets over things that can be wiped out in the event of an EMP.

I think you are missing one key point though, the cost of bitcoin is turning it into a bubble. If you look at the costs to mine bitcoin, it will become prohibitively expensive based on the total energy production. Once it reaches a certain threshold, then by all means, I expect there to be brownouts over this. If that happens, then by all means, we're definitely in bubble status.

Dec 2, 2017

bitcoin can't be depreciated, physically seized, is portable, divisible, decentralized. Chaos in Venezuela and Zimbabwe saw bitcoin trading in their local exchanges at a huge premium to international market, as citizens were scrambling for a store of value accessible digitally.

It's digital gold with tech upside. Hard to tell applications in future of advertising (due to portability and divisibility), internet of things, virtual reality, etc. Upside is spec for sure.

bitcoin is not without its downsides - energy wastefulness, susceptible to security issues in event of quantum computers, transaction fees...but these are tech problems that can be solved...a lot of developers are incentivized to innovate (and altcoins have been created to solve for these issues).

I would say the mining infrastructure and developer capital working to keep the system going also has some tangible value. How do you put a value on thousands of developers working on applications? Huge warehouses of mining farms used to process transactions (i.e. mine for bitcoin)

private blockchains will have use cases for sure but good analogy is public internet vs private intranet. Think of a company intranet...not many contributors building applications and infrastructure...so it sucks and is clunky. Now contrast that with public internet that has the market of developers working to add applications...same situation will exist with public vs. private blockchains...you cant beat an incentivized free market of contributors...

Nov 26, 2017

Idk how would you go about saying that the currency is overvalued. It implies you have a way of valuing it. There is a fixed amount of BTC generated each year, and so long as people are demanding a high amount of it relative to its supply, its value will climb. Who's to say when that will change?

If I were to guess, I would guess that at least 75% of BTC transactions are for illegal items. What legitimate vendors are accepting BTC? Why do people own the currency other than it being tied up on a dark net market or they are speculating its value?

    • 1
Nov 26, 2017

You think 75% of the $156 billion worth of BTC in circulation is being used for illegal transactions? To partially answer your question, some legitimate vendors accepting BTC include:

  • Microsoft
  • Wholefoods
  • Gap, Gamestop, JC Penney
  • Subway
  • Overstock.com
  • Expedia
  • Bloomberg

I also know you can get a slice of pizza with bitcoin. I see what you're saying, and it's definitely used for illegitimate transactions, but I don't think it's even close to 75%.

    • 2
Nov 26, 2017

Fair point. I didn't know so many legit vendors accepted it. I guess my argument really is, what is BTC better at than conventional methods or payment? When I pay with my credit card/s I get:

  • One year warranty on all electronics
  • 2% cashback on groceries/restaurants
  • Triple points on travel

The only advantage BTC has to credit cards/cash is that it is difficult to trace transactions and its value is skyrocketing. I understand that it has some efficacy in reducing transaction costs?

Dec 2, 2017

Hi ImNoBanker, just trying to help:

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  • Why the question "Is Bitcoin in a bubble?" is not the right question to ask. I was talking to friends recently and though they love Bitcoin and the blockchain, they think ... Bitcoin is in a bubble. I don't think that's really a relevant statement. The prices of Bitcoin ... trade, the Bitcoin would then fall. I find that the opposite is true. Something that is in a bubble ...
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  • More suggestions...

Or maybe the following pros can chime in... @Nittany11 @SeekingAlpha180 @Matthew-R

If those topics were completely useless, don't blame me, blame my programmers...

Nov 26, 2017

I find that many people who speculate about bitcoin's bubble refer to bitcoin to represent all cryptos as an umbrella term. There are so many different uses for cryptos that make them unique i.e. cross-border payments, digitizing of cash, remittance transactions, instantaneous transactions, and many more. I can't say for sure if this constitutes a crypto bubble or crypto revolution. Heck, even central banks are thinking of creating them.

**Things I am curious about & appreciate insight on: **
- How the CME futures will affect price of bitcoin directly
- How tZero (Overstocks) ICO platform will fair

    • 2
Nov 26, 2017

I have a hard enough time understanding bitcoin, I rarely investigate alt-coins haha.

Dec 2, 2017

I'm guessing some of the whales are cashing out and retiring on islands somewhere Ha ha

Dec 2, 2017

it's christmas time - people gotta buy them gifts, you know.

    • 1
Dec 2, 2017

I'm out a few gs

    • 1
Dec 2, 2017

Yeah I only had a few hundred in so nothing to write home about.

Dec 2, 2017

Jesus, I'm really getting hammered. Should've pulled out last week haha. These are the problems when retail investors own a sizeable portion of the market.

Dec 2, 2017

Overall, depending when you bought, should still be massive gains!

Nov 28, 2017
Yossif:

The prices of Bitcoin are extremely high, probably due to a lot of speculation, but at the same time that does not mean it's in a bubble.

http://lexicon.ft.com/Term?term=asset-bubble

Dec 2, 2017

Hi DawgStreet, just trying to help:

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  • More suggestions...

No promises, but sometimes if we mention a user, they will share their wisdom: @Rispolit @ankhosla21 @WACCFallacy

You're welcome.

Nov 28, 2017

the right question(s) is/are-

"why are people such sheep?"
"why do people blindly chase something so worthless?"
"where is the skepticism and scrutiny required for sound analysis?"

in all honesty, I don't regret one bit not buying Bitcoin.
however, I regret (greatly) not having positive returns in this stock market.
and for that, I am a self-proclaimed idiot.

    • 1
Dec 2, 2017

I am not a Wizard, sorry there are no responses yet. Maybe one of these topics can point you in the right direction:

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Or maybe the following users have something to say: @Wintercows @nbzh @yoyo250

You're welcome.

Dec 2, 2017