Is Bitcoin In Another Bubble?

Maybe. We’ve seen major moves upwards in each of the last seven days. One would tend to expect a pull back at some point.

However, there’s a particular argument that pundits like to make for the existence of a bubble that I don’t find very compelling. They basically say, “Just look at the price chart. It’s parabolic!”

BTC Price

The reason why I don’t find that compelling is that a parabolic chart doesn’t automatically make something a bubble. Imagine if a pharmaceutical company announced it just found a cure for cancer and backed up it’s claims with peer reviewed research. The price would skyrocket and the chart would be parabolic. However, in this case no one would go around calling it “bubble” simply because of the price spike.

Now let’s consider Bitcoin. Since Bitcoin is cheaper and faster at sending money than all other payment systems, there are many people who believe that Bitcoin has the possibility to completely revolutionize the payments system at minimum, and possibly even the entire monetary system. If those who believe this are right, what would it mean? For one, it would mean that Bitcoin would completely displace Visa, MasterCard, Western Union, bank wire transfers, etc. What would be the price of Bitcoin if it did that? $10,000? $100,000? $1,000,000?

This isn’t even mentioning the possibility that Bitcoin would compete directly with domestic currencies as a medium of exchange, or with gold and silver as a store of value. If Bitcoin does this, the price would go through the roof.

So why isn’t the price today $10,000 or $100,000? Well, it’s largely because people are discounting significantly for risk. It’s impossible to know at this point if it will in fact succeed or if it’s price will drop to zero. However, as more good news pours in, people will discount less for risk and the Bitcoin price will move closer to it’s (time discounted) expected future value.

Recently, there’s been a lot of good news on the regulatory front. The U.S. government seems to be accepting of Bitcoin (for now) and announced it has no intention of shutting it down completely. It’s even seriously considering allowing politicians to accept Bitcoin campaign contributions.

The seizure of the black market drug website Silk Road, while disappointing to me, seemingly demonstrated that using Bitcoin doesn’t put you out of the reach of law enforcement. When Silk Road shut down and the price largely remained the same, people said, “Maybe it’s good for something other than buying drugs”. And finally, there’s a growing sense that Bitcoin isn’t the fad people thought it was, but rather future of money and payments. All of these things are causing people to discount less for risk, pushing the price higher.

Now this doesn’t mean that Bitcoin isn’t overbought at the moment. There are a lot of amateur investors in the Bitcoin space and there definitely seems to be a bit of herding mentality. However, the price has sustained itself at this elevated level much longer than it did during the last “bubble” when it was only over $260 for about 40 minutes, and over $200 for about a day. Regardless of where it peaks, I expect the price to be higher than where it started even if the “bubble” bursts.

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