Can bitcoin be considered a bubble? That's what two bubble experts think about it.

"The tulip bubble was technological," - says the expert

Can Bitcoin be considered a bubble? This is a natural question - especially after the price of bitcoins this week rose from $ 12,000 to $ 15,000.



Therefore, we decided to find out the opinions of a couple of experts on bubbles: Brent Goldfarb , a professor of business at the University of Maryland, and William Duringer , a historian from the Massachusetts Institute of Technology. Both of them conducted a study of the history and economics of bubbles, and this week they talked to our publication by phone — while Bitcoins continue to grow in value.



Both scientists saw clear parallels between the bubbles they studied and the current sharp rise in the value of bitcoins. Bubbles are fueled by either new technologies (like the railways in Britain in the 1840s or the Internet in the 1990s) or financial innovations (like the financial fraud that led to the 2008 crisis). Bitcoin, of course, is both a new technology and a powerful financial innovation.



“Historically, a lot of bubbles included some kind of financial technology of a new type, the consequences of which people could not predict,” Deringer told us. “These financial innovations create enthusiasm faster than people manage to evaluate all the consequences.”



None of the scientists decided to predict when the current bitcoin boom will end. But Goldfarb argues that we are seeing classic signs of what happens at the end of a bubble. He said that the end of a bubble is often characterized by "high volatility and great revival."



Goldfarb believes that in the coming months we will see more "stories about how people are unrealistically rich on bitcoins." This may attract more and more new investors trying to participate in the process. Then any key event will trigger a panic that will lead to a fall in the market.



“Uncertainty in the assessment is often a serious problem for bubbles,” Deringer told us. Unlike stocks or bonds, bitcoins are not paid interest or dividends, which makes it difficult to estimate the value of this currency. “It’s quite difficult to pinpoint the foundation of bitcoins,” said Deringer.



This uncertainty has allowed Bitcoins to dramatically increase their value 1000 times in the past five years. But it also gives the market vulnerability to a collapse if investors start to lose confidence.

What is bitco-minded like tulipomania

Every time after the publication of an article about Bitcoins, in the comments

people inevitably compare Bitcoins with tulips - one of the first and most famous bubbles in history . In the 1630s, tulips were still a novelty for Europe, they were recently brought from the Middle East. There is a growing demand for tulips of exotic flowers and colors. In the winter of 1636-1637, the situation peaked, speculators inflated the prices of the bulbs up to 20 times, before the market collapsed and reached normal levels in February.



However, as Goldfarb notes, “many of these prices existed only on paper. All this happened in coffee shops. They bargained, raised the price, but only for future, futures tulips. Many of these deals never took place. ”



“The tulip bubble was a technological bubble,” says Goldfarb. “They were engaged in crossing the seeds, but they were never sure what the color would turn out until the tulips grew.” This uncertainty helped to give certain tulips an aura of mystery and potential that pushed their price upwards.



Deringer also sees parallels between tulip-mania and the bitcoin boom. In both cases, he says, "the value of the object was not limited to the calculation of economic profits, but was also determined by the aesthetic value of its coolness." Possession of bitcoins is a statement to the world about the character of your personality and what you value - just like having an exotic tulip helped a person stand out in the 17th century in Dutch society.



"Participation in the market imposes a certain stamp," says Deringer. - Having Bitcoins means making a statement about what technologies you value. Even to buy bitcoins, not to mention their mining, you need some knowledge. ”

Why bitcoins are hard to estimate

Bubbles of bitcoins and tulips are unusual, because they do not expect any profit from being traded. When a person buys a package of technological shares, he expects the company to come to profitability and pay dividends. This can be said about the actions of the 19th century railways and the radio and aircraft companies that contributed to market bubbles in the 1920s.



For all these companies, the cost took off in the early, "pre-profit" years, when they were still developing their technologies, and investors could indulge in unrealistic dreams of huge profits in the future. But companies really began to try to make a profit and create income from the technologies being developed, investors often found that their results were disappointing.



Bitcoin is not like that. Bitcoin owners do not receive dividends or other income from owning bitcoins. These are technology stocks that are forever in the pre-win phase. Because of this, it is not so obvious which events could make investors change their mind.



Goldfarb compares bitcoins with values ​​that are “artificially rare,” like works of art. “He will have value as long as people find him valuable,” says Goldfarb.



But do not lead too far such parallels. Bitcoins do not pay dividends, but their value may increase if more and more people use the Bitcoin network. Bitcoin stocks are forever limited to 21 million. So, if a lot of people want to make payments through the Bitcoin network, the cost of bitcoins will have to rise (or at least stay at a high level) to meet this demand.



Another more unusual possibility is that Bitcoin can be a digital version of gold. The value of gold does not lend itself to classical market analysis in the same way as the value of bitcoins. Gold does not pay dividends, and only about 60% of the world's gold reserves are used in industry or in jewelry.



Much gold is stored in basements and under the halves as long-term values ​​and insurance against inflation and global unrest - and this kind of speculative trading has greatly influenced its value. If enough people continue to consider gold as a good investment, it will turn into a self-fulfilling prophecy .



Something similar can happen with bitcoins. They had a large subculture of “Khodlers” - a deliberate and eccentric distortion of the word “holders” [ i.e. holders; holders; The source of the meme is a topic on the bitcointalk forum / approx. trans. ] - proud to hold on to their bitcoins as a long-term investment, despite all short-term market fluctuations. The ideology of Khodlers can be self-fulfilling just like the ideology of supporters of the idea of ​​a single gold standard [ goldbug ]: the more people who consider Bitcoins to be good long-term capital investments, the better long-term capital investments they will have.