Bitcoin

Is Bitcoin in a Bubble, or Is It Massively Undervalued?

Evaluating the current cycle of buzz

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bitcoins
Tzogia Kappatou / Dreamstime

Bitcoin is all the rage again, and its major sustained price increase in recent weeks has prompted considerable interest and novice investment in the world's first cryptocurrency. Some people see this as a sign that bitcoin's end is near, but others argue that the infant e-money is actually massively undervalued in the long run.

As is common with any price peak and flurry of media chattering, bitcoin's most recent momentum has been met with predictions of boom and doom. A Wall Street Journal survey of economists found that an astounding 96 percent believe that bitcoin is experiencing a speculative bubble. The question for them is not whether the bubble will burst, but how badly, and how soon (if ever) it will recover.

It is true that the market shows signs of frothiness. Seasoned bitcoin users have found themselves inundated with questions from friends and relatives about how to cash in on this hot get-rich-quick scheme. When I talked to radio host John Batchelor about the bitcoin price increase last week, he told me he was reminded of the famous 1929 tale wherein famed investor Joe Kennedy quickly exited the stock market after his shoe shine boy deigned to give him investment advice. Contemporary anecdotes about people taking out mortgages to buy bitcoin fall into a similar vein.

Yet some have seized upon this investment flurry as sure proof that bitcoin's days are numbered—and running out. Former Federal Reserve Chairman Alan Greenspan told CNBC that he ultimately expects bitcoin to become worthless. Libertarian investor Peter Schiff likewise maintains that "bitcoin prices are headed to $0." The Nobel Prize-winning economist and apparent BitGrinch Joseph Stiglitz went a step further, arguing that bitcoin serves no social function and "ought to be outlawed."

But contrary to the now-predictable chorus of naysayers forecasting bitcoin's inevitable death, there are very good reasons to remain quite optimistic about the private currency's prospects. Even if the currency does see a short-term price correction, as is likely, the core value proposition at the heart of the bitcoin project continually proves to be vital and needed. The longer that the project succeeds, the better its future odds.

The bubble might not be as bubbly as it looks

In the short term, the recent record-setting prices did not spring from nowhere, but can be attributed to a series of technical and financial improvements that buoy bitcoin's future.

First, 2017 was a huge year in terms of the long-fought debate over how bitcoin can best scale. For about as long as bitcoin has existed, there were questions about how the currency could overcome the apparent trade-off between usability and security.

Fortunately for the bitcoin project, the network avoided a contentious hard fork in November and settled on a harmonious path forward based on two technical fixes. First, in August, bitcoin activated a change called "segregated witness," which will increase bitcoin velocity without compromising its security or decentralization. Then, in December, dramatic advances to the "Lightning network" project were made. This infrastructure development is designed to facilitate smaller transactions in a cheap and easy way without incurring high fees or slow confirmation by the bitcoin blockchain.

Additionally, 2017 saw impressive developments in financial maturity. By the end of the year, established Wall Street institutions such as the Chicago Mercantile Exchange, Chicago Board Options Exchange, and TD Ameritrade announced they would launch bitcoin futures trading on their platforms. This was good for the price of bitcoin in several ways. First, it signaled professional acceptance of the currency, which is always good for confidence. Futures trades also promised to smooth out some of bitcoin's famous volatility. And finally, it introduced bitcoin to a whole new subset of professional traders.

To the moon?

So the short-term picture might be a lot better than many outsiders assume. But there are good reasons to be optimistic about bitcoin's long-term future as well. Even if the price tumbles a bit in the coming weeks to correct for the recent frothiness—falling to "only" $12,000 or $14,000 or so after just recently breaking the $10,000 barrier two weeks ago—many bitcoin bulls see this as little more than a buying opportunity. To them, bitcoin is just going on sale.

A bit of context is needed.

If the first message that bitcoin's creator Satoshi Nakamoto broadcast in the "genesis block" is any indication—"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks," a reference to that morning's headline of the Times of London—bitcoin was not intended to merely coexist in the current financial system, but supplant it. The problems endemic to poor government monetary management—debasement, inflation, cronyism, and boom-bust chaos—could be a thing of the past with a monetary system based on a censorship-resistant, hard digital currency.

The monetary economist Saifedean Ammous presents perhaps the most comprehensive case for bitcoin's potential as a sound monetary standard for global commerce in his forthcoming work, The Bitcoin Standard: Sound Money in a Digital Age. According to Ammous, bitcoin's real value "lies in it being a reliable long-term store of value, and a sovereign form of money that allows individuals to conduct permissionless transactions." He believes that bitcoin will one day serve the function that hard monies like the international gold standard or market-regulated free banking notes before it once served.

If this does prove to be the case, then bitcoin may be considerably undervalued indeed.

If bitcoin "hodlers" (people who hold onto bitcoins) are right, and the fundamental properties of a trustless, supply-capped digital currency are a significant enough improvement over the existing financial system, market players will gradually adopt the currency out of their own self-interest. Eventually, they believe that the financial system will switch to a totally bitcoin-based reserve economy, a flashpoint event known as "hyperbitcoinization." In that case, a single bitcoin would easily be worth millions of dollars. So "hodlers" are "hodling" for a very good reason in their view.

This may strike many as fanciful. After all, the existing system is not perfect, but it seems to do a good enough job. And it, well, exists. There are many entrenched and powerful players that are quite vested in keeping the current system going, even if it does come with the expensive baggage of regular global recessions, government financial mismanagement, and unfair taxpayer-funded bailouts.

Yet paradigm shifts always seem impossible before they become inevitable when viewed in hindsight, as the collapse of the Soviet Union demonstrates. And it's not just bitcoin believers who visualize this situation. None other than International Monetary Fund director Christine Lagarde herself publicly warned that bitcoin "puts a question mark on the fractional banking model we know today."

Of course, a lot can go wrong on the way to a sound post-state digital monetary system. But in the event that the stars align and things do go right, then the current bitcoin price appreciation will pale in respect with the future.

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  1. “after his shoe shine boy deigned to give him investment advice”

    Your source is mistaken: It was Bernard Beruch, not Joseph Kennedy.

    The fun story about Kennedy is that FDR picked him as the first Chairman of the SEC because Kennedy was a well-known and well-skilled stock swindler himself. It takes a thief, etc…

      1. I’m making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life.

        This is what I do… http://www.onlinecareer10.com

      2. I’m making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life.

        This is what I do… http://www.onlinecareer10.com

  2. Many of the alt coins are much more useful than bitcoin as a currency. Right now the only purpose bitcoin itself has is to buy it and hope to sell it to the greater fool. It’s definitely a tulip craze sort if thing at the moment.

    1. You’re right about the only real value of bitcoin right now. It is the only significant entry point into public cryptocurrencies/alts from fiat. Some of those others even now have better blockchain protocols (more scalable, more efficient, more secure ‘edges’, etc).

      And the entire ‘cryptocurrency’ space will be eviscerated in a nanosecond if one honest nation-state actually creates a protocol around a blockchain-based currency. Doesn’t even need to be ‘capped’ mathematically – since the only function of that cap is to create a zero-sum game (easier math issue) – and if liberty is now a zero-sum game, then liberty is dead for most people.

  3. TokenPay is a new alt coin currently in ICO that addresses many of the shortcommings of BitCoin.

    1. And then there will be TokenPayPlus and BitCoin2.0 and PrimoCoin and SuperCoin and SuperMegaCoin and SuperMegaCoinPlus and SuperMegaCoinPlus2.0. The supply of crypto currencies is infinite, so the value will approach zero.

      Eventually a consortium of trusted providers (think Amazon, Google and Facebook, yuk) will create the one cryptocurrency that will rule them all, and it will be widely adopted. For the legitimacy and reliability, most people will trade off getting government approval (and warrant access to your keys, then eventually the providers just giving the keys to the government for anti-terror and anti-drug investigations, so it won’t be a cryptocurrency at all.)

  4. In other words, nobody knows and are projecting their own expectations on how this will turn out.

    1. One thing that I do know is that more people pumping money into Bitcoin will cause it to continue to go up. If people continue to only withdraw money out of Bitcoin, then the price will go down.

      1. lets not be crazy

  5. “Bitcoin’s real value “lies in it being a reliable long-term store of value, and a sovereign form of money that allows individuals to conduct permissionless transactions.”

    Part of this gets it wrong from an American perspective. It’s the same part that gets it absolutely right from the perspective of people in other countries.

    Two points:

    1) “Allowing individuals to conduct permissionless transactions” meant one thing to Americans back when Silk Road was going strong. Those days are probably over–not because Silk Road went down but because blockchain technology makes all transactions ultimately traceable. Because we’re not to total visibility yet doesn’t mean we won’t get there. It’s just a matter of time.

    One of the reasons the government might want to insist that everyone uses a blockchain dollar in the future is specifically because it will mean that transactions can no longer happen anonymously.

    1. Cryptocurrencies, like TokenPay, use techniques that make transactions completely anonymous.

      1. What I wrote was specific to Bitcoin, rather than all cryptocurrency, and it was in response to the suggestion that Bitcoin is valuable, in part, because it offers “permissionless transactions”.

        Bitcoin actually offers less in the way of anonymity and persmissionless transactions than cold, hard cash, and that might be the best reason why governments would adopt Bitcoin’s model for the U.S. dollar in the future.

        I don’t see any evidence to suggest that the government prefers anonymous transactions.

        Having said that, while I appreciate that TokenPay’s model may be completely anonymous now, I’m dubious of anything digital’s claim to perpetual anonymity. Even if the token itself were perpetually anonymous, the ability to track who gave that token to whom may become traceable in the future–if it isn’t already.

        1. that might be the best reason why governments would adopt Bitcoin’s model for the U.S. dollar in the future.

          The reality is that the NSA itself created the outlines for bitcoin/crypto/blockchain in 1996. Here – https://goo.gl/zx9RVX – to a cryptography group at MIT. Here – https://goo.gl/19acRn – same article to a DC-based university law review.

          Bitcoin itself has the same ultimately-centralizing flaws of the NSA model – and prob every digital currency will have the same flaws (or ‘features’ from a govt perspective).

      2. I remember when the suggestion that the government was tracing all of our phone calls and and emails was a feverish conspiracy theory that only nut jobs would talk about in polite society. There is no technological substitute for our society’s commitment to individual rights, government accountability, and freedom. Any advantages we gain in that race by way of technology will always be temporary.

        Tools are neither pro-freedom nor anti-freedom. They’re just tools, but they can change the game.

        Technophobes in the past were mostly about the job destroying aspects of technology–and they were always wrong about that. This is a little different. The reason the government didn’t track all our phone calls in the past was because it was technologically impossible and prohibitively expensive. Once those barriers were breached, the Fourth Amendment didn’t stop them.

        We live in a society now where people are willing to trade their privacy for convenience. There are qualitative preferences associated with that, and people who are willing to make that trade no doubt think it’s a good one. For those of us who don’t value convenience over privacy, making the U.S. dollar a cryptocurrency a la bitcoin won’t be a good thing. They may despise cryptocurrency technology–and the world it enabled–and rightly so.

  6. 2) “Allowing individuals to conduct permissionless transactions” gets it absolutely right when we’re talking about people in China wanting to be able to get their money out of the country–either now or in the future.

    We’ve seen speculative property bubbles materialize in countries where Chinese people with money are likely to want to flee when the mob shows up with the pitchforks and torches. That’s because real estate was one place where the Chinese government would let people invest internationally until recently. Housing bubbles in Australia, New Zealand, Vancouver, and elsewhere materialized because of that. A lot of that has been shut down recently through new capital controls–but Bitcoin is probably picking up some of that slack.

    Bitcoin isn’t valuable in that situation because of standard pressures on the currency. It’s valuable because wealthy Chinese people can use it to make their wealth portable. It’s a hedge against revolution. This isn’t just a speculative bubble. I suspect this is partially about the utility of circumventing China’s capital controls–among other real world benefits. Until the risk of revolution is lessened or China gets rid of its capital controls, I’d expect the “bubble” to keep rising.

    1. “Some examples of such outflow controls are strict limits on the amount of money that can be transferred to overseas accounts; higher scrutiny of Chinese companies that wish to acquire assets overseas; or the installation of facial recognition software in ATMs in places frequented by mainland Chinese such as Macau (the PBoC is also considering introducing this system in Hong Kong)”.

      —-Financial Times

      “China’s Tight Capital Controls Fail to Address Underlying Problems”
      Strict controls keep funds in the country, inflating bubbles and storing up policy headaches

      https://tinyurl.com/yalewvj8

  7. I think this is a musical chairs scenario (as much as I wish it weren’t). I think the first significant sell offs of bitcoin will make massive amounts of money and drain the value out of the remaining bitcoins.

    I suspect it will start when Satoshi Nakamoto does a sell off. If he was smart enough to predict all that he did with bitcoin, he was smart enough to do it to make the kind of money he stands to make as the seller that kills bitcoin.

  8. Let me summarize the article:

    ” “

    1. Heh

  9. Bitcoin is going to take any long investors for a hell of a ride. As I write this, the ETF’s value is tanking (GBTC down over 21%)… likely due to short investors after yesterday’s gains. If you know how to time the market, then you’ll make big $ regardless of where the value goes. However, anyone who experienced the IPO craze of the late 90’s should get in early on any cryptocurrency offerings in 2018. They’ll skyrocket before they tank. The trick is to get out at the right time.

    1. My friend told me it’s best to buy low and sell high. So, I’ve got that going for me.

      1. True. But “low and high” are relative terms in a bubble. Anyone who sold their bitcoins in June sold high, and are likely kicking themselves today for selling waaaaay too low.

        1. You’re relatively high, and a towel.

          1. And $15K richer this morning off of buying high and selling low. We’re they your shares I shorted?

            1. Is buying high and selling low something you can learn, or more of an innate talent?

              1. The technical term is “luck”.

                1. “The technical term is “luck”.”

                  There are some pretty consistent trends in the daily price fluctuations of bitcoin.

            2. So you think shorting is buying high and selling low?

              You would make an awesome counterparty.

              1. “So you think shorting is buying high and selling low?”

                If I thought that, I’m not sure how my short trade would have been possible this morning. I was trying to make a point that simple long positions aren’t the only option to make money.

  10. The Nobel Prize-winning economist and apparent BitGrinch Joseph Stiglitz went a step further, arguing that bitcoin serves no social function and “ought to be outlawed.”

    The main threat to bitcoin is political.

    Governments don’t like currencies they can’t get their paws on.

    1. The main threat to bitcoin is technology itself. Bitcoin itself is version 0.1 of blockchain. And blockchain itself may well be version 0.1 of distributed ledger tech or cryptographic OS/software.

      The moment a more advanced tech comes along, bitcoin will approach the use value of – oh – a completely useless old computer that can no longer connect to anything and that you can’t get parts for.

      What’s kind of funny is that computer technology is now being viewed as an immutable permanent store of anything – when the timeline for computer technology itself is measured in months or years at most. Much shorter than paper – or metal – or baked clay tablets – or carved rocks – which were the form of money our blue-faced butt-scratching altogether-inferior ancestors saw as ‘permanent’.

  11. Profits aren’t for pussies.

  12. I started in the tech industry. If you want my cash, you have to come take it from me. Meanwhile, NK can mine bitcoins using your computer. Anyone over 35 still appreciates physical money and most people do not have the technical know how to deal with cryptocurrency. 100 years from now, maybe. But considering the wits of the population, I doubt it.

  13. I started in the tech industry. If you want my cash, you have to come take it from me. Meanwhile, NK can mine bitcoins using your computer. Anyone over 35 still appreciates physical money and most people do not have the technical know how to deal with cryptocurrency. 100 years from now, maybe. But considering the wits of the population, I doubt it.

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  15. Wait…this is under the masthead of Reason, right? Supposedly a libertarian journal, right?

    “After all, the existing system is not perfect, but it seems to do a good enough job.”

    What about “the existing system is based on coercion, and the emerging digital currencies are completely voluntary.”

    No? Not relevant?

    Sheesh.

    1. >> Supposedly a libertarian journal, right?
      Not deontological libertarian, though

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