Is Bitcoin The Most Obvious Bubble Ever?
The comments above & below is an edited and abridged synopsis of an article by Derek Thompson
To call Bitcoin the biggest and most obvious bubble in modern history may be a disservice to its surreality. It might make sense for a new public company with accelerating profits, but Bitcoin is not a company and has no profits. It is a digital encrypted currency running on a decentralized network of computers. Ordinary currencies don’t double in value by the month, unless there’s a historic deflationary crisis. Instead, Bitcoin’s behaviour resembles a collectible frenzy, like Beanie Babies in the late 1990s.
There is no perfect comparison to illuminate the value of something like Bitcoin. It’s a currency (like dollars), whose owners consider it a long-term store of value (like gold), which is appreciating as if it were a collectible (like Beanie Babies) and is running on a blockchain platform, which some insist could change the future (like the internet). How can we be sure Bitcoin is a bubble if we don’t have a proper comparison—dollars, gold, Beanie Babies or the internet?
One feature of the Bitcoin market that could both explain its high valuation and suggest an imminent correction: The crypto market is insanely concentrated. Approximately 1,000 people own 40% of all Bitcoin in circulation. Just 100 accounts control 17% of the market. If a handful of them sell even a small portion of their shares, it could dramatically move Bitcoin’s price, potentially triggering a massive correction, as retail investors try to sell. The upside is minimal contagion effects. If the Bitcoin bubble crashes, it likely won’t spill out into the general economy, like the subprime mortgage crisis did 10 years ago.
In 2033 the blockchain might be an integral infrastructure for the digital world, and Bitcoin at $16,000 might be an absolute steal. But we don’t live in 2033. This is still real-world 2017. And Bitcoin’s last few weeks are the real-world definition of a speculative bubble.