No, Bitcoin Is Not in a Bubble

To think that such a festive concept, one that evokes both sophistication and childlike wonder, could become so financially charged …

Last week, Bank of America Securities chief investment strategist Michael Hartnett said in a note that bitcoin looks like “the mother of all bubbles.”

Harnett seems to be using the strength and speed of bitcoin’s price rise as the base for his diagnosis, as if that is the main feature of a financial bubble. It isn’t.

Continuing the misuse of the word, in a note quoted on Bloomberg this week, investment management firm Man Group said: “Every time a bitcoin bubble bursts, another grows back to replace it … This very frequency makes the bitcoin narrative somewhat atypical relative to the great bubbles of the past.”

This is less irritating in that Man Group recognizes that bitcoin is “atypical” – but it also seems to believe that bitcoin is a bubble. It’s not.

To see why, let’s pull out our financial dictionaries:  

Investopedia: “During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value (the price does not align with the fundamentals of the asset).”

Nasdaq: “A market phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset.”

Wikipedia: “A situation in which asset prices appear to be based on implausible or inconsistent views about the future. It could also be described as [an asset that trades] at a price or price range that strongly exceeds the asset’s intrinsic value.”

Do you see the common thread? An asset is in a bubble when its price increase is unrelated to its intrinsic or fundamental value.

What is bitcoin’s intrinsic value? Nobody yet knows. We’re looking at a still young technology that is evolving alongside the demand for it. The technology’s future use cases are still unclear, as is its place in the financial ecosystem. And bitcoin’s unique investment characteristics and unfamiliar metrics make it impossible to apply traditional valuation techniques. Many have opinions as to its fundamental value, but you only need to look at the wide range to realize they are based on unestablished theories and untested logic.

So, anyone saying that bitcoin is in a “bubble” is making a judgement call on its intrinsic value. But they never (not that I’ve seen, anyway) share their calculations or even reveal the number that they’re thinking of.

Maybe these analysts and commentators are using the term “bubble” in the social sense?

Economist Robert Schiller defines a speculative bubble as a “social epidemic whose contagion is mediated by price movements.” Those of us that spend time on Twitter or YouTube may be nodding in recognition. But Schiller specifies “epidemic” (an unfortunate metaphor in 2020-21), which implies mainstream participation. The cacophony of bitcoin maximalists and altcoin…