Is Bitcoin just a bubble?

by on November 30, 2017 at 7:53 am in Economics, Uncategorized, Web/Tech | Permalink

Some people think so, in the associated video clip Joe Stiglitz says Bitcoin should be banned.  Here is some FT skepticism from Jean Tirole.

I used to think Bitcoin was a bubble, but I no longer hold this view.  If nothing else, put all the more complicated factors aside and think of Bitcoin as competing for some of the asset space held by gold and also to some extent art.  Gold, too, in its hedging functions is a “bubble,” though not a bubble.  It is hard to ship, but has some extra value because it is perceived as a focal asset and one that does not covary positively in a simple way with the market portfolio.  The same is true of Bitcoin, yet that kind of focality-based “bubbliness” can persist for centuries.  Note by the way that gold has become less of a hedge, partly because inflation has been low and partly because China and India dominate the gold market more than a few decades ago.  So new and better hedges are needed.  And what a backstory Bitcoin has, making it a strong competitor in this regard.

I am not saying that is the Bitcoin story, it is simply a Bitcoin story, a minimalist account that can appeal to skeptics.  And you can buy this story and still think the current price is either too high or too low.

This estimate claims there is $241 trillion of wealth in the world, make of that what you will (there is something nonsensical about such aggregate measures because they are not traded against anything).  If you imagine people wish to hold one quarter of one percent of that in crypto form, that gets you to about $600 billion in value.  Currently crypto assets (on good days) hover near $300 billion in market capitalization.  Is that so crazy?  I genuinely don’t know, but that is one way of thinking about market cap in this sector.

I will continue to watch with interest.

1 clockwork_prior November 30, 2017 at 8:14 am

Just think how many tulip bulbs or South Sea Company certificates you can buy with just a fraction of a Bitcoin. And it will be even more next week, next month, next year, next decade. Buy Bitcoin now, before the price becomes unaffordable, and you miss out on the biggest opportunity since the Mississippi Company.

For those interested in history, this is pretty much considered the definitive historical overview – ‘Extraordinary Popular Delusions and the Madness of Crowds’ by Charles Mackay.

Of course, it was not written by am economist. Really, who cares about someone who merely paid attention to centuries of human history when looking at popular delusions and the madness of crowds.

2 Jason Young November 30, 2017 at 8:36 am

you’re so mad that you’ve been wrong about BTC. look, it’s already considered legitimate by a fair number of people, and the probability of it gaining wider acceptance is *much* higher than it used to be. just give in, admit you were wrong, and buy one in case you’re still wrong.

3 tim November 30, 2017 at 9:18 am

You don’t have… any skepticism or confusion about what’s happened the past year and a half? I own a little BTC and read about it here and there, go to crypto twitter etc. When it got to $700, people wondered what was happening (and some people just kept saying “Venezuela!!”). Now that it’s at $10,000, BTC holders refuse to even discuss the strangeness of all this. And it’s especially irritating since BTC types are often conspiracy theorists in every other area of life.

Couldn’t something weird be happening, like the Chinese are just mining it on government electricity and selling it to each other to inflate the price? The idea that the Fed is out to get you but some unknowable group of dark web hackers is looking out for your best interests — I just don’t know if I believe it.

4 bill November 30, 2017 at 9:46 am

I agree. And isn’t it possible that the rules for mining get changed? And the market could get flooded. Or a large country could outlaw bitcoin? Or electricity and computing power get cheaper so that mining the coins goes faster? I’m dismissive of bubble talk per se, but I see some practical things that could result in lower prices. And I’m even more sure that there are risks here that I don’t see or understand.

5 JWatts November 30, 2017 at 10:01 am

” Or electricity and computing power get cheaper so that mining the coins goes faster? ”

No, not really. There’s a finite supply of BitCoins (21 million) and the supply is running out. Currently about 80% have been mined.

It’s also odd and mildly suspicious that the person that founded bitcoin ‘Satoshi Nakamoto’ has a stash of 1 million inactive bit coins (worth over $10 billion now) and that no one knows who that person is or even if it’s actually a person and not a group.

6 bill November 30, 2017 at 10:26 am

Thanks. I didn’t know that (about the finite supply).

7 Dave November 30, 2017 at 11:15 am

You really shouldn’t be commenting if you don’t even know there’s a finite supply. That’s bitcoin 101.

8 Fukamoto November 30, 2017 at 3:58 pm

The reason, why Bitcoin and all similar projects will fail, is it’s technology, called “distributed ledger”. It is an ever growing computer code. This technology is based merely on a HOPE that computer technology will keep up with a pace of growth of the distributed ledger. Unlike ordinary software, where developers can keep it small in case that hardware doesn’t advance fast enough, the growth of a distributed ledger is uncontrollable. It grows with every transaction.
Simply, it is as scientific as if a rocket scientist used an unknown material and said: “Let’s hope that it will last.”
Nakamoto: “storage should not be a problem”.

9 Anon November 30, 2017 at 4:46 pm

@Dave – none of us know everything, give the guy a break. He’s asking reasonable questions.

10 The Original D December 3, 2017 at 3:44 am

Jwatts, I read a comment like this on MR 2.5 years ago (maybe from you?) and decided to buy BTC that day. Made a lot of money and then rotated it into Ethereum. Let the good times roll.

11 jason y November 30, 2017 at 10:23 am

What if it is as simple as… BTC really is a breakthrough in store of value technology and more and more people are gradually realizing it, or realizing that others will soon realize it? Why couldn’t it be that simple?

I didn’t buy in until recently because I thought that the powers that be would see the threat and ensure it never seemed legitimate. I no longer think that’s true.

12 tim November 30, 2017 at 10:52 am

Certainly could be that simple! Could definitely just be that. I hope it’s that b/c I haven’t sold mine yet.

But I also don’t think that’s the obvious, super-high probability explanation. I don’t think there’s any Occam’s Razor here. And even if something suspicious has driven its rise, it could still maintain its value if people are now persuaded it’s a useful store of value.

I am not anti-BTC, again. I like the idea of it and have a bit of it. But if someone looked at the all-time BTC chart and pointed at late 2016/early 2017, and was like “oh, what happened there” and I said “More and more people realized that BTC really is a breakthrough in store of value” it just feels like an insufficient explanation.

13 Mark Thorson November 30, 2017 at 4:49 pm
14 Bob November 30, 2017 at 10:42 am

A very large percentage of bitcoin mining efforts happen within China, that’s pretty well known. However that has nothing to do with the price of bitcoin, as the amount of bitcoin “minted” by miners is pre-determined, and it’s just a matter of which miners get it: Therefore, the ownership of the miners shouldn’t affect price by itself.

This doesn’t make the price change good, or a result of free market forces though. Significant manipulation of the Bitcoin price has happened before (see, MtGox’s attempts to hide their loss of coins) , and it could be happening right now.

My personal guess on the price increase (and this is absolutely a guess) is that it’s quite likely that anyone looking to make serious changes to the technical internals of Bitcoin is going to end up having to fork the chain to make their alternations, and those forks mean that if you have bitcoin at the fork’s beginning, you also have an equivalent amount of $new_bitcoin_derivative. A fork “winning” vs what is out there now is not unlikely, since bitcoin’s tech is not exactly in the best grounds, for a wide variety of reasons that would take many paragraphs to explain. So this means that anyone that is bullish on cryptocurrencies, instead of saving their money and make a lot of different bets, is now thinking that having a balance of bitcoins now has a much higher upside than before.

15 The Original D December 3, 2017 at 3:42 am

Who needs Venezuela when you have Russian oligarchs hobbled by sanctions?

16 clockwork_prior November 30, 2017 at 9:53 am

‘you’re so mad that you’ve been wrong about BTC’

I’m curious – how have I been ‘wrong’? I seem to remember (memory can play false, of course) basically having no particular expressed opinion about bitcoin one way or the other.

‘just give in, admit you were wrong, and buy one in case you’re still wrong.’

That is hilarious, to be honest. Unfortunately, demonstrating the greater fool theory works better with Prof. Cowen’s loyal readers. Though Isaac Newton might the sort of person you could sell to – ‘”Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.”‘

17 Jeff R November 30, 2017 at 9:22 am

Didn’t an Asian guy invent it?

18 ʕ•ᴥ•ʔ November 30, 2017 at 9:38 am

Hey, I am popular enough to be impersonated. Good vocabulary. Probably too good for my style.

19 ʕ•ᴥ•ʔ November 30, 2017 at 9:40 am

Also, not, enough, commas.

20 rayward November 30, 2017 at 8:20 am

Cowen, the libertarian that he is, not only defends Bitcoin, he defends offshore bank accounts. What Bitcoin and offshore bank accounts have in common is evasion of laws adopted by governments. Read the essay in Bloomberg. Cowen at once expresses concern about offshore bank accounts being used to evade taxes, while defending offshore bank accounts because they allow oligarchs and others to store their billions out of the reach of the countries from which they acquired their billions. Sometimes I think Cowen is the Michael Kinsley of economists. For those who aren’t familiar with Kinsley, he is the political journalist known for expressing contrarian views. It was clever. For awhile. Then it became annoying.

21 widmerpool November 30, 2017 at 8:33 am

Ray, you need to develop a healthier scepticism of the all-around wonderfulness of laws and taxation.

22 A Truth Seeker November 30, 2017 at 8:37 am

So that’s what Americans have become: people who fight taxation.

23 NPW November 30, 2017 at 8:40 am

So that is what truth seekers have become: people who don’t remember the Boston Tea Party.

24 A Truth Seeker November 30, 2017 at 8:48 am

So that’s what American Whites have become: people who dress like Indians and throw East India Company’s tea away.

25 dan1111 November 30, 2017 at 8:52 am

So this is what this blog’s comment section has become. So annoying.

26 widmerpool November 30, 2017 at 8:56 am

And insist on imperial measurements and gun rights. Outstanding!

27 A Truth Seeker November 30, 2017 at 9:17 am

“So this is what this blog’s comment section has become. So annoying.”
So this is what this blog’s comment section has become: petty complainings.

“And insist on imperial measurements and gun rights. Outstanding!”
“Bureaucracy defends the status quo long past the time when the quo has lost its status.” So do Americans. Sad!

28 Careless November 30, 2017 at 11:07 pm

Yes, that would be completely new behavior for Americans

29 Bill November 30, 2017 at 8:51 am

Bitcoin will be good for terrorists, for countries facing sanctions who need to move money,


What could go wrong.

30 Jeff R November 30, 2017 at 9:24 am

As often as Bitcoin exchanges seem to get hacked and everyone’s “wallets” emptied, I’d say it’s perfect, actually.

31 Bill November 30, 2017 at 9:33 am

I am waiting for quantum computers to empty the wallets.

32 Anon November 30, 2017 at 4:51 pm
33 Harun November 30, 2017 at 2:00 pm

Suddenly terrorism is a big issue!

34 msgkings November 30, 2017 at 2:03 pm


35 The Original D December 3, 2017 at 3:47 am

You forgot drugs

36 TMC November 30, 2017 at 8:37 am

Bitcoin’s price is just a reflection of the tight funnel in which Chinese and Russian millionaires can get money out of their countries. Once they can do so legally, or there’s a different avenue, the price will collapse back to $200.

37 charlie November 30, 2017 at 9:15 am

Yes — well maybe not millionaires.

But clearly Bitcoin is a shadow of the shadow banking in China.

I’m not sure of the technology here, but it would not seem that difficult for the Chinese government to clamp down when they want to. Throwing people into jail works wonders on technological problems.

I also wonder how much North Korea is involved in all this.

38 The Original D December 3, 2017 at 3:49 am

My pet theory is Satoshi Nakamoto was actually Kim Jong Il, who died about a year after Satoshi disappeared. Unfortunately for Kim Jong Un he didn’t write down the key to his wallet.

39 Trump Fan November 30, 2017 at 9:43 am

Do you have any evidence for the assertion that this recent rise in bitcoin’s price is due to Russians and Chinese? I accept that coins have useful functions as far as hiding money from governments or buying illegal drugs online. But a valuation in the hundreds of billions? That’s not nerds trying to buy drugs or Russian oligarchs trying to hide money That’s an asset bubble.

40 Rob November 30, 2017 at 7:17 pm

It is almost certainly due to the Chinese. Possibly Russians as well, but I haven’t seen much proof of that. I 100% agree with the thesis that avoiding capital controls is what is drove interest in China, but I feel that we have lost the threat and now it’s just a general madness of crowds situation.

Here is a long winded article that covers China and Bitcoin:
I’ve read that 60% of mining is now done in China. There is some worry that the three largest miners in China make up more than half of the mining power, which leads to the possibility of a Sybil attack.

41 Mark November 30, 2017 at 8:48 am

‘I used to think Bitcoin was a bubble, but I no longer hold this view.’

that’s a polite way of putting it. I believe Tyler called someone a ‘fool’ for putting his retirement savings in Bitcoin.

42 Dan November 30, 2017 at 9:06 am

God, to be that fool… Bubble or not there have got to be some uber rich tech-utopian nerds out there rn

43 Brett November 30, 2017 at 10:27 am

There are some folks who have made out like bandits for sure. A lot of them will keep gambling with other coins or risky investments, assuming BTC doesn’t collapse. There are always amateurs finding creative ways to lose their shirt even in traditional investments (options, futures, etc). I doubt someone who put a big chunk of their retirement savings in BTC will just cash it out and invest in a diversified portfolio. They’ll figure out a way to burn it.

44 The Original D December 3, 2017 at 3:51 am

An acquaintance of mine made $20 million from BTC. He bought it when it at 11 cents. He moved to South America and owns a brewery now. Also a small apartment building that he rents on AirBnB.

45 harpersnotes November 30, 2017 at 8:52 am

So much money, sitting mostly idle for so long. And with so many of the world’s greatest dynastic fortunes having been made when political powers have used money to create armies for wars. I imagine libertarians think cryptocurrencies decrease the risk of wars. I’m not entirely convinced of that. But even if it is true, if and when wars do break out in a new and radical shifting of the world order, cryptocurrencies seem likely to be among the first pots plundered. Perhaps the current Saudi Arabia method of what might turn out to be confiscatory ‘taxes’ for military growth is informative in this regard.

46 Beliavsky November 30, 2017 at 8:52 am

Is there data on how the cost of mining Bitcoin has changed over time? Is the market price of Bitcoin cointegrated (do the levels move together) with the cost of mining it?

47 Skip Intro November 30, 2017 at 9:52 am

I don’t have time to look up the data, sorry, but the supply of BTC is, by design, finite. Therefore, the costs of mining BTC have gone up dramatically over time.

It will be interesting to see what happens to BTC after the last one is mined.

48 bill November 30, 2017 at 10:27 am

Could someone create the equivalent of Bitcoin II?

49 Brett November 30, 2017 at 10:32 am

There are many other cryptocurrencies, so that’s one risk. Lets say the current value of bitcoin isn’t a bubble — as Tyler points out there’s a small percent of assets that people want to put in gold, etc. If competing cryptocurrencies catch on, won’t that affect Bitcoin?

On the other hand, gold is also up in the last year. So does that suggest they don’t compete for the same investment dollars? Or does it suggest that BTC is a bubble?

50 Huey November 30, 2017 at 5:33 pm

surely gold and bitcoin haven’t been competing for the same investment dollars. mature bitcoin perhaps is like gold, but bitcoin at present/over the past couple of years is the ultimate growth risk asset

51 The Original D December 3, 2017 at 3:53 am

Check out Ethereum. It’s a better protocol and has utility as a computing platform. It’s the second largest cryptocurrency by market cap.

52 The Original D December 3, 2017 at 3:54 am

I don’t think the last one ever will be mined, certainly not in our lifetimes.

53 ʕ•ᴥ•ʔ November 30, 2017 at 9:00 am

A nice lady we know mentioned that she had 600 bitcoin, but took some profit along the way, is down to 50. But given that this nice lady has also been at other times addicted to day trading, and online poker, I tend to group it all together. Bubble.

54 Potato November 30, 2017 at 5:36 pm

So short it.

I’m sure plenty of people here would be willing to bet the other side.

55 ʕ•ᴥ•ʔ November 30, 2017 at 9:56 pm

Too risk averse to go long at $100, and too risk averse to go short at $10,000. Such is my lot in life.

56 Massimo November 30, 2017 at 9:01 am

Totally agree on crypto currencies. The value of all gold ever mined is about 9 trillions, albeir this includes jewellery and gold sunk in galleons or used in high-tech applications. Bitcoin capitalization is about 1% of it. It has space to grow if it is the only (or the main) very liquid, anonymous asset around. My worry is that some other crypto currencies will be better fit as medium of payments and therefore will take the role of storage of value too.

To whom says that cryptos help criminal, yes, they help small-time criminals. But they are a major problem for the biggest criminal of all, the state.

57 raj November 30, 2017 at 9:48 am

Blockchain currencies are the opposite of anonymous. Every transaction is publicly logged. You must use other techniques (Tor, mixing, stealth addresses, etc.) to obfuscate your identity.

58 Massimo November 30, 2017 at 10:08 am

Doesn’t change the fact that I’m a big Cuckold.

59 lordcirth December 1, 2017 at 9:32 am

There is work being done on anonymous blockchains, such as Zcash, using zero-knowledge proofs.

60 collin November 30, 2017 at 9:07 am

I used to think Bitcoin was a bubble, but I no longer hold this view. If nothing else, put all the more complicated factors aside and think of Bitcoin as competing for some of the asset space held by gold and also to some extent art.

Isnt that when it is truly a bubble when most expert pundit all agree that it is no longer a bubble? I seem to remember that in the housing market in 2005. Anyway:

1) I agree it is small enough of the global investment for both big increases and decreases.
2) As an investment it is not for the faint of heart or probably best to consider borderline gambling.
3) It does appear to be growing because of China as a way to getting money out.
4) I am a bit surprise alternative crypto assets are growing a lot. Why hasn’t one dominated Chinese markets?

61 Mark Thorson November 30, 2017 at 2:27 pm

When people start saying they used to think some investment vehicle was in a bubble but have changed their mind about that, that’s a sign the bubble is getting near bursting.

62 Ryan Turner November 30, 2017 at 9:14 am

At present almost everyone who is buying and holding bitcoin is doing so purely because they expect to be able to sell it later at a higher price.

63 JWatts November 30, 2017 at 9:47 am

+1, this is the sign of a bubble. When the ratio of use to speculative appreciation gets out of whack. That ratio certainly varies for different type of goods, but it seems extreme in the case of Bit Coins.

“If you imagine people wish to hold one quarter of one percent of that in crypto form, that gets you to about $600 billion in value.”

Well, I could imagine it, but it seems extremely unlikely. There aren’t any fundamentals to drive it up. You can point to the value of gold, but gold has uses (jewelry, electronics, etc) and more importantly it’s been a store of wealth for ages. It’s imminently tradeable anywhere and at anytime. Bitcoin is very much a financial tool. As such, it has value only when it’s useful for that purpose. It’s doubtful that $20K BTC’s serves that purpose.

64 Brad DeLong November 30, 2017 at 9:42 am

I still cannot wrap my mind around how a stable long-run value for BitCoin can coexist with infinitely elastic supply of BitCoin-like assets. Gold is the only gold-like substance: silver is a pale imitator. Art requires that art critics like it. What limits the supply of BitCoin-like assets in the long run?

65 ʕ•ᴥ•ʔ November 30, 2017 at 9:55 am

That is definitely an aspect. Bitcoin has a value in branding. The other crypto currencies that break from the pack do too. Ethereum leveraged some wonky coolness to “silver level” popularity with the punters.

66 The Original D December 3, 2017 at 3:57 am

Ethereum has utility. It’s early days still but there is a ton of innovation happening. I believe the killer app for crypto will be built on Etherum.

67 Gotta say it November 30, 2017 at 10:04 am

got milk?


68 acarraro November 30, 2017 at 10:06 am

Not only that, but the actual amount of crypto assets is exploding right now, it’s not just a potential issue…
They are hundreds of ICO, each piling into the space. I don’t really understand why it would end differently from stock…
I am even doubtful there is a single google or facebook in the crypto mix…

69 Careless November 30, 2017 at 11:49 pm

There’s at least one new, currently going website up, And it’s gotten about as much venture capital as pets did.

70 The Original D December 3, 2017 at 4:06 am

I’m skeptical of most ICOs but it’s far too early to say there’s not a killer app among them. At launch most people thought Google was redundant because of Yahoo, Excite and Altavista.

71 SG November 30, 2017 at 10:12 am

Network effects?

72 ʕ•ᴥ•ʔ November 30, 2017 at 10:17 am

Of course, but some marketing as well. Mystery. Counterculture. A cool name.

Would everybody be buying a StinkyCoin with exactly the same technical specifications?

73 Anonymous November 30, 2017 at 12:26 pm
74 John Q November 30, 2017 at 10:12 am

@The Cuckmeister-General

hey, give the guy a break. Brad is a very nice guy.

75 jason y November 30, 2017 at 10:16 am

Bitcoin is a Schelling point because it was the first and because it has had explosive, headline-making growth. History has already decided that if any crypto becomes an agreed upon store of value, it will be BTC.

This isn’t all that different from why certain art is valued while other art is not. The history of art and art criticism has already been written, so it just won’t happen that Vermeer is suddenly worth nothing while some obscure 17th century nobody is all the rage because you cannot convince enough people to agree to the step by step process that would lead to a collective revaluation.

76 Raphfrk November 30, 2017 at 10:35 am


People say that Bitcoin’s value is because you can use it for cheap p2p trading, but that is only part of it (and recently fees have risen).

It has value because it is the most likely to become the dominant cryptocurrency in the future. Even if it crashes and burns, maybe a future fork of it will win. Current holders will get coins in that fork too, so a Bitcoin is not just a Bitcoin, it is sum(all future forks of Bitcoin).

This is why it is critical that it maintains its status as premier cryptocurrency. It is like a diamond good, but with reputation.

The dominant currency will have huge network effect. Everyone will need some because everyone else uses it.

A success story for a cryptocurrency is that initially everyone is a “holder”, since the investment potential is so much higher than the usefulness as a currency. Like a startup maturing, it eventually matures into a currency where most of its value is due to its utility as a currency. Without the latter you can’t have the former, but the former may last for a long time.

77 ʕ•ᴥ•ʔ November 30, 2017 at 10:52 am

I think that is a good argument, and maybe a reason to “buy the dip” (or crash), but you also plant the seeds of the counterargument.

“Like a startup maturing”

We have no history of a startup achieving lasting dominance. No matter how strong IBM or Microsoft looked, something else came to be cooler.

78 msgkings November 30, 2017 at 11:58 am

But IBM and especially Microsoft are still here, and huge. The optimistic case is that BTC matures into something that does truly last as an agreed upon store of value, like gold. Gold’s intrinsic value as a metal is a fraction of its price. BTC doesn’t have that fraction (yet, if it ever gets used much as currency then it will), but gold proves it’s not needed. Tyler I think is pretty much correct to frame it this way, and to expect BTC in some form will last as alt-gold, especially for millenials.

I am surely trying here to talk myself into buying some LOL

79 ʕ•ᴥ•ʔ November 30, 2017 at 12:15 pm

Maybe I should have used AOL and Myspace. But yeah, you are right, there is potential for continuing use.

80 The Original D December 3, 2017 at 4:08 am

I think Bitcoin has some serious technical problems that may be its undoing.

But don’t fall into the trap of treating it like a stock. There is no leadership or quarterly earnings.

81 mavery November 30, 2017 at 11:12 am

This makes no sense. Gold and Art aren’t stores of value just because everyone agreed that they were. They’re stores of value because you can display them and accrue prestige from them. So unless the super-rich start having gaudy displays of BTC (How would this even work?) I don’t see how you get the point where people just “agree” that it’s a store of value.

82 jason y November 30, 2017 at 11:53 am

and you can accrue prestige because enough of the right kind of people share certain beliefs about those works of art.

83 RC November 30, 2017 at 12:15 pm

Brad DeLong,

I see it like this… You can make reproductions of paintings relatively easily and inexpensively, but the reproduction will never be the original, even if the difference exists only as an awareness by the owner. Bitcoin has the legacy of being the first, the crazy history of Satoshi Nakamoto, the stories of the lost hard drives worth millions and the billion dollar pizza, etc. You can clone Bitcoin, but the clone isn’t Bitcoin.

Humans are hard-wired storytellers. A centuries-old gold ring owned by a queen is worth more than the metal, gems, and workmanship. The value is in the story. Bitcoin’s story is the lion’s share of its value, and it’s one hell of a story. If you have the means, you can own a piece of that story. How fun.

84 Harun November 30, 2017 at 2:03 pm

Why does anyone hold US dollars when there are tons of other brightly colored paper currencies out there?

/kinda joking.

85 Elliot November 30, 2017 at 8:18 pm

Brad, the main benefit of using the cryptocurrency with the biggest network effect is reduced volatility, compared to other cryptos. We still see high volatility in Bitcoin because the price is now based on lots of uncertainty about its future use. As it reaches saturation the volatility will be much more like gold.

Some people will invest in smaller cryptocurrencies hoping that their popularity will rise, and that they’ll make money. So small cryptocurrencies will always exist.

However, there will be a lot of people who want to store wealth in the most stable possible cryptocurrency. All of these people will crowd into the biggest one. None of them will have any incentive to switch (for the portion of their wealth that they want to be stable).

86 A Truth Seeker November 30, 2017 at 10:43 am

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87 Lee Reiners November 30, 2017 at 10:59 am

According to Minsky’s framework, Bitcoin and other crypto assets are most certainly a bubble. You can read more here:

88 Craig November 30, 2017 at 11:03 am


All the gold would be a cube about the size of a baseball diamond. Or you could own 1/3 of every company in the S&P 500. Which would you rather have? (Buffett made this argument first. )

But, given that gold is very valuable, and isn’t likely to lose significant value soon, bitcoin could provide a similar role. It is more limited in future growth than gold, and it is so much easier to move around. You might say that gold would be safer right now because of its long, long history of value. That’s true, but each year that bitcoin doesn’t go down significantly in value that argument becomes weaker. If you are a skeptic, you should be able to forecast how long you are going to view this last argument as dispositive. Either bitcoin goes to ~zero or you accept bitcoin to the same extent you accept gold.

Call it a Schelling-behavioral result. For some reason, some irrational investors want to hold a hard asset that is guaranteed to be in limited quality. Given that, it’s possible bitcoin could rival gold for that role.

89 Harun November 30, 2017 at 2:04 pm

If i live in China and am not allowed to buy US stocks, for example?

The demand may not come from Americans.

90 Tom December 3, 2017 at 5:13 am

Every bitcoin that will ever exist fits onto a USB stick. Or you could own a modest part of the companies in S&P 500. Which would you rather have?

91 KevinH November 30, 2017 at 11:04 am

I think you are probably right that bitcoin will be around for awhile as a niche player. I think the most fascinating thing about bitcoin is that it may be the largest form of inefficient technology gaining on more efficient technologies. History generally runs in the opposite direction.

Also, I think that niche will be pretty much saturated by illegal activity of various moral quality. One woman’s censorship is another woman’s political corruption.

92 lbc November 30, 2017 at 11:33 am

bitcoin is only really useful if you are a criminal laundering money.

93 The Original D December 3, 2017 at 4:13 am

Or selling massive quantities of drugs. Much more portable than duffel bags of cash. You can transfer massive amounts of money on a hardware wallet that fits in your pocket.

94 msgkings November 30, 2017 at 11:44 am

“I will continue to watch with interest.”: don’t be coy, Tyler! Are you long BTC or not? I’m not, and kind of kicking myself, but then comforting myself that I felt the exact same way being underinvested in tech stocks in 1999.

95 ʕ•ᴥ•ʔ November 30, 2017 at 11:56 am

I took the Coursera Startup Engineering course in August 2013. It required me to open a Bitcound account, which I did, without buying any coins. It would have been so easy. The price then was $100.

Obviously I am too risk averse.

96 Matthew November 30, 2017 at 11:51 am

I hate hate hate the gold-bitcoin comparison. Everyone know what gold is and why it has a place in our perceived value of a relatively useless non-income producing asset world. 99% of people playing with bitcoin know nothing about cryptography or the scaling issues of it. Gold is a fully-informed price. Bitcoin is a just people passing along a buzzword,

97 msgkings November 30, 2017 at 12:12 pm

Sure but these things evolve. Right now it’s the crazy phase. There will be a shakeout, but BTC won’t go to zero. Cryptocurrencies as alt-gold are likely to stay in some form. It’s part of the virtualization of the entire world that we are living through. 99% of people on Facebook know nothing about the technology behind it either.

98 Matthew November 30, 2017 at 12:22 pm

Facebook users are the product–not the owners. I guarantee 100% of facebook’s private investors knew about the tech.

BTC could very easily go to zero. There are several known paths to zero, and myriad unknown ones. 85% of bitcoin mining happens in China. You think maybe they will socialize the companies that mine it, and 50% attack the network? You think it will retain value when they start putting bullets in the heads of money launderers (it’s not very anonymous after all)?

99 msgkings November 30, 2017 at 12:29 pm

Even if China killed every Chinese miner and money launderer, the coins are still there in the network, and the 15% (non Chinese miners) would have an easier time mining. It’s a global situation. And yes, a Chinese crackdown is exactly the kind of thing that could start the shakeout. The dotcom crash happened and yet the internet is still here.

100 Matthew November 30, 2017 at 12:58 pm

You’re the exact type of person I’m talking about. You don’t even know what a 50% attack is. That is an essential piece of information in understanding what bitcoin is and is not capable of being, and instead of learning these types of things, you just advocate for it without full information.

101 msgkings November 30, 2017 at 2:02 pm

Actually isn’t it called a 51% attack? And I’m not advocating for anything. I’m actually pissed I didn’t buy in around $1000 when I first asked my techie friends about it. Why don’t you address my point if you know so much?

102 jason y November 30, 2017 at 2:45 pm

do you know who nick szabo is? why dont you go argue about the gold-bitcoin comparison with him.

103 Virriman November 30, 2017 at 11:52 am

Cryptocurrencies started at zero and will probably end up with a price greater than zero in the long run. There is no way for the journey from point A to point B to NOT look a lot like a bubble. Someday they’ll invent a term to describe this sort of situation.

I agree that market cap is one of the best ways to look at cryptocurrencies. They are a new asset class that will eventually reach an equilibrium with other stores of wealth. Bullion and the paper cash of reserve currencies seem to be the most appropriate assets to compare to – scarce, global, fungible, divisible, counterfeit resistant, etc. They tend to have market caps between $1 and $10 trillion. Long run cryptocurrency market cap could very well be lower or even zero if something goes catastrophically wrong, but I’m not going to cry “bubble” until it surpasses its peers.

104 The Anti-Gnostic November 30, 2017 at 4:52 pm

But all money is not alike: a million Zimbabwe bucks are not equivalent to a million US dollars, whereas commodities like gold, copper, and hardwood lumber are fungible. Money seems to derive value from the fact that enough people accept it in trade over time. But that seems kind of superficial and circular, so I guess we ask what are the fundamentals: a stable civil order, high productivity, large, liquid market, and relative scarcity. What are the underlying fundamentals of Bitcoin? Or maybe this is different. I have no idea which is why it’s probably a good idea for me not to buy Bitcoin.

105 Boonton November 30, 2017 at 11:52 am

The analogy with art seems pretty apt to me. In one sense you could analgoize art collecting to Bitcoin. In art collecting you have to ‘mine’ value by attending auctions and shows buying unknown artists at low prices in the hopes you’ll get a ‘coin’….someone that turns very collectible. Those established ‘coins’ go up in price as people opt to use art as a store of wealth.

Maybe Bitcoin is just a type of ‘number art’ where your artwork is a string of digits. The advantage is that Bitcoin has a chain of custody so it’s almost impossible to pass off forgeries.

106 poorlando November 30, 2017 at 11:53 am

As usual, authoritarian statists like Joseph Stiglitz want to ban anything that takes away their ability to control you.

107 Marc November 30, 2017 at 12:16 pm

Three comments:
1. The environmental impact of bitcoin is appalling. The electricity required to process transactions must grow to offset tech gains in mining. This is a fundementally bad thing for the world.

2. Corollary to #1 is that Bitcoin’s core “activity” is to convert cheap Chinese coal into US$ outside of China. That’s not such a good thing to bet on, as a market/asset/whatever.

3. More than 50% of mining capacity exists in China. Therefore, bitcoin is subject to a 51% attack by the Chinese government WHEN they nationalize/confiscate the mines. This is inevitable:

108 Harun November 30, 2017 at 2:07 pm

What if its the Chinese government employees that are actually using bitcoin to move ill-gotten assets overseas.

Oooops. Not so inevitable.

Who do you think needs to money launder in China?

Its all government officials and their bribes.

109 The Original D December 3, 2017 at 4:17 am

The Chinese government is made up of many Chinese individuals who have their own agendas. I’m sure many party members have direct and indirect stakes (bribes) in these mining operations.

110 Marc November 30, 2017 at 12:19 pm

Three comments:

1. The environmental impact of bitcoin is appalling. The electricity required to process transactions must grow to offset tech gains in mining. This is a fundementally bad thing for the world.

2. Corollary to #1 is that Bitcoin’s core “activity” is to convert cheap Chinese coal into US$ outside of China. That’s not such a good thing to bet on, as a market/asset/whatever.

3. More than 50% of mining capacity exists in China. Therefore, bitcoin is subject to a 51% attack by the Chinese government WHEN they nationalize/confiscate the mines. This is inevitable. Government wants to destroy all the wealth of the people who sneaked the coal out of the country? Check. Government wants to impose some exogenous financial catastrophe on the rest of the world? Check. The Chinese government cannot “steal” the bitcoin with a 51% attack because executing the attack makes bitcoin worthless. It’s closer to saying “we’re filling a vault with huge amounts of cash. Then we’re going to set the contents on fire to punish the people who put the money in the vault, or cause some general havoc from which we can benefit.”

111 Boonton November 30, 2017 at 4:05 pm

Well if Bitcoin is displacing holding gold then I think the energy equation changes a bit, mining gold takes quite a bit of energy.

112 Warren Platts November 30, 2017 at 12:21 pm

My concerns:

1. At current rates of electricity consumption, BTC mining will consume the entire planet’s electricity supply in like 5 years. Obviously, that’s not gonna happen.

2. It’s slow. It’s nowhere where it needs to be with transactions <10 per second; Visa does thousands of transactions per second.

3. Because of (2), they're already charging extra fees so you can jump to the front of the line.

4. When the number of bitcoins hits 21 million, the network will have to rely on transaction fees to keep the network of miners going.

5. If the price of BTC declined so much that mining was not worth the price of electricity, the entire network could collapse.

113 Bob from Ohio November 30, 2017 at 1:56 pm

Bitcoin is a fad and hence of course a bubble. All fads are bubbles.

114 msgkings November 30, 2017 at 2:02 pm

How are you so sure it’s a ‘fad’?

115 Rafael R November 30, 2017 at 2:32 pm

Global wealth is more like 600 trillion actually. China’s wealth alone is 130 trillion, while the US’s is about 90 trillion.

116 Rafael R November 30, 2017 at 2:33 pm

By the way, the argument that “aggregate measures of wealth are nonsensical because they are not traded against anything” was also made by Mises (1949) when he criticized the concept of national accounts.

117 Judah Benjamin Hur November 30, 2017 at 3:01 pm

If you think bitcoin is a good investment at this point, I have some virtual real estate to sell you.

118 Mike November 30, 2017 at 3:21 pm

This three part pods series was a great explainer to the tech and possibilities

119 Judah Benjamin Hur November 30, 2017 at 3:33 pm

Gold and (desirable art) has intrinsic value. People would pay for it even if they were prohibited from reselling. Moreover, it’s role as a hedge is precisely because it is tangible.

I’m not arguing that crypto-currencies should be worthless, but their function is mostly to engage in illegal activity (I don’t necessarily mean immoral, it can help protect people from totalitarian governments).

120 Boonton November 30, 2017 at 4:03 pm

What exactly is the ‘intrinsic’ value of art and gold that is missing from Bitcoin?

121 msgkings November 30, 2017 at 4:15 pm

You can hang art on your wall, and you can wear gold and use it in dentistry and electronics and such.

122 Boonton November 30, 2017 at 4:42 pm

I can print a copy of my bitcoin and put it in a safe. Or put the safe on my wall.

“can wear gold and use it in dentistry and electronics and such.”

This isn’t really an ‘intrinsic’ value. It’s dentistry value depends not on the gold but on how important dentistry is, whether or not there are substitutes for gold in dentistry etc. For example, if 3-d artificial tooth printing becomes super cheap and easy the idea of a gold filling might become antiquated. Ditto for it’s use in electronics.

123 Careless December 1, 2017 at 9:02 am

I can print a copy of my bitcoin and put it in a safe. Or put the safe on my wall.

I could do that without even owning any. Absolutely no intrinsic value.

124 msgkings December 1, 2017 at 11:57 am

Boonton, then nothing has intrinsic value except water and air, because everything “depends on how important it is” and there are substitutes for everything. You’re really reaching here to be argumentative, it’s not hard to see the difference between lines of code and a physical object.

125 Boonton December 1, 2017 at 2:35 pm

I’m asking how you define what ‘intrinsic value’ is and how do you measure it? What does it mean to say something has twice as much intrinsic value as something else?

It seems like intrinsic implies some type of objectiveness that doesn’t vary with tastes, the values of other things, etc. Two bricks is twice as many as one brick…even if I don’t like bricks, don’t need bricks, can or can’t use something in place of bricks for making a house etc. So on that trivial level I can get that quantity might be of intrinsic value but that’s apples and oranges. I have no idea if two apples or two bitcoins are more or less valuable than two bricks.

If you can’t articulate this as a concept then why are we talking about whether or not Bitcoins have ‘intrinsic value’?

126 Boonton November 30, 2017 at 3:39 pm

Would quantum computers allow a bitcoin miner to ‘jump ahead’ and score the next block of coins faster than the once very 10 minutes the Bitcoin protocol has designed?

127 Tom December 3, 2017 at 5:17 am

If so, the mining difficulty will rise.

128 RafaelR November 30, 2017 at 4:57 pm

Also, criptocurrencies will eventually replace government money: their supply is fixed so there is no risk of inflation. Hence it’s a better mean of exchange than fiduciary money. People will eventually get used to use bitcoins to buy things and eventually government money will be worthless. The world will be finally freed from shirty government monetary policy! Also, since money supply will be fixed the return on holding money will satisfy Friedman’s rule and the world economy will benefit greatly.

129 Boonton November 30, 2017 at 7:32 pm

When you’re dealing with serious money there is no problem with inflation.

130 Bartolini November 30, 2017 at 7:54 pm

Bitcoin isn’t a bubble; of course it isn’t. It doesn’t rise to that high a standard.
Assets–things that have value–have value for a reason: Currency has a government behind it with a need to maintain financial credibility. Homes have usage value. Corporate goodwill has the promise (not always kept) of future earnings growth and dividends.
Bitcoin has nothing of value behind it, and only a shadow of value in front of it: only the hope that someone else might need an underground currency more than you do and will pay for the privilege of having it.
The only folks that perceive real value in bitcoin are those that need to move money underground, and are willing to take great risks in value in the course of the laundering. It’s a currency supported by the needs of the marginally and not-so-marginally illegal market participants. Not much else there. . .

131 Bartolini November 30, 2017 at 7:56 pm

I should have mentioned–tulips and beanie babies at least had something of value, making it fair to call their explosion in prices a bubble. Bitcoin, not so much.

132 Mulp November 30, 2017 at 9:35 pm

Big Bang Theory today was based on bitcoin. And the way bitcoin wealth has typically vanished.

133 msgkings December 1, 2017 at 12:04 pm

When something hits the sitcoms, the bubble is close to popping. I remember a short-lived weekly TV drama set in a brokerage office in 1999, kind of ‘LA Law’ or “Grey’s Anatomy’ for stockbrokers. Or how about all those house flipping shows from 2006? Yeah, that’s how tops happen.

134 Evolutionarily December 1, 2017 at 12:15 am

Bitcoin is also a protocol for the digital transfer of value over a communications channel, which makes it difficult and more nuanced to value or quantify its bubbliness.

“But people say, “Bitcoin has no intrinsic value.” They complain that it’s not tangible. They ask, “how do you value it?” To those objections, complaints, and questions, I have a challenge of my own: value TCP/IP for me, please. Can you identify a proper “unit” of TCP/IP and give it a value? Please ensure that you account for all valuers; that is, integrating the value an American household with two computers, three smart TVs, two iPads and three iPhones places on it compared to say, a dude in a mud hut in Somalia.

People get hung up on the “ridiculously high, bubble price” of a Bitcoin. But, each Bitcoin is already divisible by 100 million units, or Satoshis. It’s built into the protocol. At this instant, one Satoshi trades for USD $0.0000373507. From that perspective, Bitcoin sounds pretty cheap. See, in part, we’re dealing with scales and semantics here.”

135 msgkings December 1, 2017 at 12:06 pm

Come on dude, no one is valuing a “unit” of TCP/IP and saying you can convert it to $10,000 cash. Analogy fail.

136 shiv December 1, 2017 at 3:22 am

As long as money laundering and underground trade persists, Bitcoin will always have utility. Base price should equal marginal cost of mining bitcoins.

137 msgkings December 1, 2017 at 12:07 pm

What happens when the last one is mined? Does the value go to infinity (= cost of mining new ones) or zero?

138 Shiv December 1, 2017 at 12:56 pm

Possibly infinity if it achieves mainstream acceptability (replaces Fiat currency). I think of it’s price/value as function of its share of global transaction value. It captures a decent chunk of illegal/underground transactions at present but little presence in the legal economy.

139 msgkings December 1, 2017 at 1:00 pm

It will never replace fiat currency. The governments of the US, EU, China, etc would shut it down well before. It would still exist but be even more illicit than now.

140 Shiv December 1, 2017 at 11:44 pm

I don’t believe it will replace paper currency either but it could surely co exist. It’s a USD 175 bn asset right now. A little more difficult to ban it when it becomes a USD 1 tn asset. It will eventually become a good store of value with more participants and liquidity. My only concern is people could lose faith if it drops severly. I only hope bitcoin hoarders behave like liquidity providers instead of trying to make a quick buck

141 The Original D December 3, 2017 at 4:21 am

It will not be mined until the year 2140. In the long run we are all dead.

142 Roger Barris December 1, 2017 at 2:01 pm

This is an unusually sloppy argument from Tyler.

Gold has long been considered to be a hedge because of its negative correlation with other assets and inflation, factors which appear to have recently declined but at least there is a history here. There is absolutely no evidence that bitcoin can serve as a hedge in this manner, regardless of its “backstory.”

As to the argument from the amount of aggregate wealth, this could apply to anything. Wampum. Tea bricks. Cigarettes. This calculation justifies nothing.

143 Zach December 1, 2017 at 4:43 pm

It seems to me that there are two arguments being made for bitcoin in this thread:

1) If only I’d bought in at $10!
2) Bitcoin’s economic role is to compete with gold as an extremely stable form of value storage.

But #1 is completely inconsistent with #2!

The principle of gold is that you buy it, you put it in a vault somewhere, and when you take it out of the vault, it has roughly the same value as when you put it in. That’s not true in practice, but it’s kind of true, and historically there were very few competitors.

Nowadays, gold is less appealing, because there are other competitors which are a closer approximation to being a risk-free long term value storage — you could say that US Treasuries play the same economic role today that gold certificates played when the dollar was pegged to gold.

Bitcoins are a terrible method of storing value! They go up and down too much. They’re a great way of storing bitcoins, but the purchasing power of bitcoins fluctuates constantly. It’s fine to say they’re not inflationary, but when has the value of a dollar fluctuated by 20% over a couple of days?

144 msgkings December 1, 2017 at 8:25 pm

Proponents are arguing that we are still in the startup phase, that with wider adoption and mainstream vehicles like ETFs and futures and the like the volatility will decrease.

145 The Original D December 3, 2017 at 4:27 am

Gold is also local You can put it in a safe, but if that safe is in Botswana and you can only sell it to other Botswanans what is its true value? Of course, you can lug that gold down to an agency that exports it but will you get the full price? Will you get shaken down, robbed or taxed? Crypto can fit in your pocket and be transferred around the globe in minutes.

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