
The Bitcoin bubble – Greater fool theory - rbanffy
https://www.economist.com/blogs/buttonwood/2017/11/greater-fool-theory-0
======
autokad
I was having a conversation about bitcoin, and I was saying the fact that the
price goes up so fast means people cant/wont actually use it as a currency. I
think someone bought a pizza with 10k bitcoin? thats now 70 million $. Even in
the last year it has moved up so fast, and if people think it will continue to
grow 'because of adoption', people cant actually 'adopt' it and use it as a
currency, because todays bitcoin is worth a lot less than tomorrows.

then i realized, i was describing deflation.

~~~
mbrock
It definitely means people won't use it as a unit of account (for debts,
budgets, etc), which is one primary use for a currency...

But I don't think it means people won't spend it or trade it for some other
currency or asset. If you held a bunch of bitcoin while the price in USD
doubled, and you happened to want a new smartphone, you're sure you wouldn't
buy one?

If you were absolutely confident the price would quickly rise even more, maybe
you would prefer holding, but if you really want the phone and you think
BTC/USD has some risk?

~~~
Nursie
I'd spend dollars on the phone, because the same BTC might buy 10 phones in a
few weeks.

~~~
mbrock
It's the same opportunity cost whether you spend from your BTC account or your
USD account! You're choosing between "should I buy a phone or 0.1 bitcoin with
these dollars?"

I think the presence in the market of an asset that many people believe is
continually underpriced would have a general effect on spending, not just on
the utility of that asset as a medium of exchange...

~~~
Nursie
>> It's the same opportunity cost whether you spend from your BTC account or
your USD account!

Only if obtaining BTC is frictionless and fee-free, something far from
universal.

------
porter
Famous NYU valuation professor on how to value bitcoin:

[http://aswathdamodaran.blogspot.com/2017/10/the-bitcoin-
boom...](http://aswathdamodaran.blogspot.com/2017/10/the-bitcoin-boom-asset-
currency.html)

~~~
tom_mellior
The key part is the statement that "it cannot be valued". Saved you a click.

~~~
Balgair
To expand on this, as it is mysterious to me:

The reason it cannot be valued or invested-in is that it is a currency, and as
such it only has a price. The difference is a bit murky to me (value v. price)
but I think it's because as a currency it has a 'fiat' kinda representation.

------
apo
_But it is one thing to become a millionaire (the word was coined during the
Mississippi bubble of the early 18th century) on paper, or in "bits"; it is
another to be able to get into a bubble and out again with your wealth
intact._

The Mississippi Bubble is an interesting one to invoke here. It was a share
bubble fueled by France's overprinting of paper money and habitual currency
devaluation.

The idea was to create a monopoly that would exploit the vast riches of
France's territories in North America. The company never got off the ground,
but the shares were sold and began trading anyway. Investors starved for
returns flocked to the trading of the shares.

So yes, it's entirely possible that the overproduction of money by the world's
governments is fueling a speculative bubble in stocks, bonds, Silicon Valley
startups, and even digital currencies - not unlike the Mississippi Bubble.

Unlike the other inflating assets, however, the supply of bitcoin is rigidly
fixed. As world governments produce ever more currency in an attempt to keep
the other bubbles inflated, we can expect the bitcoin exchange rate to respond
accordingly.

It's worth noting that the basic idea behind the Mississippi company was
sound. The Mississippi was set to become a hub of world economic activity and
valuable almost beyond measure - but not on the time scale of the day's short-
sighted investors.

------
simias
The article is perfectly right when it describe what drives the current
Bitcoin craze and its insane valuation but the conclusion is frankly a bit
lazy:

>When the crash comes, and it cannot be too far away, it will be dramatic.

People have been saying that Bitcoin was going to crash for years now. And it
has, multiple times, but always recovered so far. Seems like there's no
shortage of "fools" willing to pump the currency even if for the most part
they probably don't completely understand what it is, what it does and how it
works.

~~~
nxsynonym
Yeah I'm pretty disappointing in the quality of this article, especially
considering its coming from the Economist.

The summary is a coin flip in essence.

It did, however, get me to think about this question: Is there a point where
enough "fools" get involved that Bitcoin becomes "too big to fail"?

~~~
marcosdumay
Well, people with no idea about how computers operate have been stopping me to
ask my opinions on BTC recently. If there's a point where enough "fools" get
involved for anything to happen that's a symptom this point is near.

But the way more usual outcome is that a bubble pops, not that it is lifted
into infrastructural status. (But yeah, both happen, just with widely
different rates.)

------
megafounder
When the majority is claiming 'there's a bubble' in a certain asset, then it's
undervalued or not understood. When the majority claims 'there's no bubble',
then usually it's a bubble.

~~~
jlft
Reminds me of the Sequoia "RIP: Good Times" and all the "tech bubble warning"
articles in 2008.

------
andrewmutz
Both can be true:

\- that bitcoin is an important tech that will eventually gain widespread
adoption

\- current high price of bitcoin is due to speculation and is a "bubble"

~~~
wickawic
question at this point though: If a crypto currency were to gain widespread
adoption, why would it be Bitcoin?

~~~
quickben
Probably wouldn't. You need something that scales if all are to use it.
Bitcoin, in the current form doesn't at a level to replace Visa tap pay. For
example, for a country of 20 million buying bagels on their way to work.

~~~
mbrock
By this standard, gold and USD also don't really scale, because you can't send
them fast enough. Interbank clearing is pretty slow.

We already have exchanges and clearinghouses like Coinbase for example. It's
easy to imagine a Bitcoin-backed payment infrastructure offered by Coinbase or
a Visa-like consortium of exchanges.

Of course this taps into a huge and messy ideological debate about what kind
of thing Bitcoin ought to be.

~~~
quickben
Whatever it ought to be, it should start by supporting more than 25M
transactions a day.

I hear people preaching wider adoption by all means, but none tackles the
limits.

I apologize, but it looks like the proponents want money in, and scarcity
remaining.

------
_pdp_
Not sure if this is true but I heard that currently less then 1% of the world
population holds bitcoin deposits. Only a handful of people are holding large
bitcoin deposits. Now if you believe that Bitcoin will get widely adopted then
why is it so difficult to believe that the price will go up? And why do you
care how much a single bitcoin is worth? As if we are going to be trading in
whole bitcoin numbers. Fractions are perfectly fine and if you have problems
with them just use multipliers.

Apart from the lack of legal structures, is Bitcoin that different from bonds
or holding stock options which you bought for pennies? Alaska was purchased
for mare $7m in 1960s which is worth $100m in today's money. You no longer can
attach a price for Alaska because it not for sale but it is certainly worth a
lot more. Similarly, Bitcoin is by far the largest wealth distribution most of
us will experience.

Now you may disagree that with the fact that Bitcoin is currently traded for
prices way above to what it used to be worth 6-7 years ago but similarly from
the 1960s to 2017s the average inflation is about 1430.1% Keep mind that the
60s were neither globalised nor connected as much as today. And in a global,
connected world everything happens at much faster pace.

Btw, I am not an economist, neither I claim that I have a good grasp of
cryptocurrency. I just have an opinion :) and that all it is.

~~~
gberger
1%? I would have guessed 0.1 - 0.2%.

~~~
_pdp_
I thought about this too when I was writing my comment but then I was also
hoping that someone else will correct me.

------
tom_mellior
Nothing in this article is new, but OK. Here is its conclusion:

> If everyone tried to realise their Bitcoin wealth for millions, the market
> would dry up and the price would crash; [...]. And because investors know
> that could happen, there is every incentive to sell first. When the crash
> comes, and it cannot be too far away, it will be dramatic.

Let's try this with something else:

If everyone tried to realise their Google stocks for millions, the market
would dry up and the price would crash; [...]. And because investors know that
could happen, there is every incentive to sell first. When the crash comes,
and it cannot be too far away, it will be dramatic.

If everyone tried to realise their hoarded gold for millions, the market would
dry up and the price would crash; [...]. And because investors know that could
happen, there is every incentive to sell first. When the crash comes, and it
cannot be too far away, it will be dramatic.

Look, I'm an economist! Sell your Google shares _NOW_!

(Or, to make the point directly, yes "that could happen", but that doesn't
mean that it's likely. And if it's not likely, the conclusion doesn't hold.
And if the conclusion doesn't hold, the author is not justified in saying that
it's likely. The argument is essentially a circular one: If I assume that
Bitcoin is likely to crash, I can "reason out" that it is likely to crash.)

~~~
howlin
Google shares represent a stake in Google's revenue stream. It has an
intrinsic value beyond what you could currently sell a share at on the stock
market. Likewise gold has some intrinsic value in manufacturing and
ornamentation.

Bitcoin has no intrinsic value. Its value is just what you can trade it for at
the moment.

~~~
tom_mellior
> Google shares represent a stake in Google's revenue stream. It has an
> intrinsic value [...]

I'm not up to date on Google specifically, but for a long time in its
existence, it did _not_ pay a dividend, so its shares did _not_ represent a
meaningful stake in Google's revenue stream. Did they have an intrinsic value
anyway?

But regardless of your answer to that, my statement stands. If everyone
holding Google stocks suddenly started selling them off, the price _would_
crash. It's just very unlikely that it would happen. More likely for Bitcoin?
Maybe, but people have made this doomsday argument for quite a while now, and
so far it's not proven right.

~~~
jonex
You buy stake in _future_ dividends. For companies that don't have any
dividend currently you just have to compensate for the time delay when
calculating the value.

If everyone would race to sell Google stocks for no reason, the price would
quickly drop to a level where it would make huge sense to start buying.
Imaging having a dividend to price ratio of 1000%. Even with no dividend,
buying stocks (preferably with voting rights) in a company at a price to
profit ratio of 1000% would be a great deal as it'd be a small thing to start
paying dividends with those profit levels.

This does not mean that there aren't overvalued stocks and physical assets
which does not make sense to buy at the current price. Bubbles has occurred
before...

~~~
tom_mellior
> You buy stake in _future_ dividends.

So no intrinsic value then. Just the expectation of possible future earnings.
That obviously cannot work!

> the price would quickly drop to a level where it would make huge sense to
> start buying

Like for Bitcoin. Yes, there would be enough Bitcoin fans who got rich enough
on Bitcoin to have spare cash to start buying if it dropped a lot.

Thanks for playing.

------
HorizonXP
The article makes a valid point. Everyone can not possibly sell all of their
Bitcoin, and if they tried, it would be defined as a crash. I would be lying
if I said I wasn’t worried about this.

But I think it’s wrong to think of Bitcoin as a commodity, or that it needs
some killer application. I really think Bitcoin is best thought of as a
currency. Fiat currencies work because as a whole, we agree on its value.
Usually, it’s backed by a country’s government, which represents the country’s
populace. It’s value is inherently determined by the size of their economy.

Right now, Bitcoin isn’t backed by a government at all, but it’s still backed
by people. Those people obviously feel that Bitcoin is worth what it is today.
Of course, that can change, just like any currency.

But eventually, Bitcoin will reach a value high enough that more and more
people will start accepting it alongside fiat. I mean, go to any border town
along the Canada-U.S. border, and they all accept USD and CAD. Clearly, they
do that because it’s advantageous to attract customers. That could eventually
happen with Bitcoin. Then we’ll stop worrying about Bitcoin’s valuation so
much, insofar as we stop worrying about the values of fiat currencies. It
matters, but not that much.

When that will happen, and at what value, I have no idea. But until then, I’m
hodling.

~~~
ska

       Fiat currencies work because as a whole, we agree on its value.
    

This is fuzzy thinking, as it doesn't even make sense to talk about the value
of a currency - only it's price. Mixing up concepts like this is what makes a
lot of bitcoin and related conversations very muddled.

When you start off your thought with a category error, as you have here, it's
hard to get anywhere useful.

~~~
koonsolo
You got me confused now. The price of $1 is $1, no? But the value is that I
need 1 or 100 to buy a bread.

~~~
ska
$1usd == $1usd is a tautology, not a price.

how much you need to buy a loaf of bread is purchasing power.

The price of a $1USD is always relative to another currency, you can't price
it in isolation.

None of these things are valuations.

------
krupan
The "blockchain" hype right now feels so much like "internet" hype in the late
1990's. Was that a bubble? Yes, but successful companies and technologies did
emerge from it. People did make money too: those who started companies (even
the companies that aren't around anymore), those who got lucky and invested in
the few winners (like Yahoo), and those who invested broadly across the whole
"internet" market.

~~~
flunhat
I want to believe this argument so badly, but it's been 7 years and we still
don't have a widely used application related to it. How much longer do we have
to wait?

While we're on this topic, why are all Ethereum projects so damn meta? Like,
the top dapps are all recursively related to Ethereum in some way (like
wallets for ethereum, different ways of spending ethereum etc.) If a
technology is new and exciting, shouldn't it be relevant _outside_ of its own
little meta-bubble? Like Amazon, for example. Buy stuff without going
anywhere. It uses the internet but doesn't somehow recursively relate to it.
Where's a similar dapp today?

~~~
deevolution
ARPANET adopted tcp/ip in 1983. That's a solid 16 years before the beginning
of the internet bubble. Blockchain is far from being a mature technology.

~~~
acdha
That's a tricky comparison: network connections were expensive and computers
which could run an operating system which supported TCP/IP cost more than your
car until the 90s. In contrast, everything anyone in the world needs to use
Bitcoin has been a commodity from the day it launched.

The difference is that the average person doesn't have a need which would
motivate them to use it. As soon as networks became available, people jumped
on them because there were tons of things they could do: download software,
chat, shop, find a date, read the news, etc. Bitcoin hasn't found that draw
yet — literally the only time I've heard a non-technical person mention it was
because they'd heard about a VC investing in a startup and they were wondering
whether they should buy some in case the price goes up.

------
petraeus
Bitcoin is only increasing in value because nobody wants to sell, and the
small amount that is mined daily is not enough to satisfy the speculators.

In a world where bitcoin is actually use as currency, its value would crash
into the ground.

------
gedrap
I don't think that anything new could be said about bitcoins right now, and
it's been like that since summer, really.

Some people do indeed believe in them, whether for technical reasons or for
simply being invested, while others just keep thinking that it will crash.
Both sides have a point, and majority of the people are convinced that they
are right, but there's no way to predict the future.

Let's just see what happens.

------
SirensOfTitan
I really love Ethereum and have been invested in it for a while. I think
@vbuterin and crew have a clear idea as to how to move past problems, and I
find it exciting to watch the Ethereum foundation execute their vision well.

Bitcoin, on the other hand, doesn't perform its simple functions well in the
short term, and seems to have very little idea on how to scale long term:

1\. Transactions are still pretty expensive and take a good while to settle.

2\. Proof of work as a long term consensus strategy just doesn't work. The
amount of energy required to mint transactions is immense.

3\. Bitcoin hasn't made the headway with corporate partnerships that I think
will be critical for larger adoption.

On Ethereum's end: a movement to proof of stake, sharding with global
consensus, and the corresponding lightening and whisper networks all are
really exciting domains of exploration. My two primary worries here are:

1\. There has not been much work yet to bring well designed languages to the
EVM at this point. Well designed languages, with good testing frameworks
(QuickCheck from the Haskell landscape comes to mind), and formally verified
fundamentals (e.g. wallets) are critical for contracts to be viable for
anything other than playthings.

2\. I worry about regulation totally hammering down innovation in this arena
before it can sufficiently get past the rough early days. I do cautiously
applaud Russia's hesitance to regulate, in an attempt to avoid destroying
innovation.

On (1), I would love to get involved writing adapters for languages or subsets
of languages like OCaml or Haskell to compile down to the EVM. If anyone knows
of any resources I could jump into to explore this type of project, I would
love it if you linked them.

~~~
ufo
Smart contracts are an inusual programming environment, both in termos of what
you are doing (managing state transitions, etc) and computing resources
available (CPU and RAM are very expensive).

I suspect that this is better solved by more domain specific languages instead
of an existing FP language

~~~
SirensOfTitan
> I suspect that this is better solved by more domain specific languages
> instead of an existing FP language

I don't disagree, but with the current state of current Ethereum languages:
Viper and Solidity, I feel as though using the good thinking in an existing
well designed language might be more worthwhile to explore in the short to
medium term.

------
cletus
So I've been giving this a lot of thought. I mean after I lick my wounds about
not buying any Bitcoin at any point ever. But alas...

I honestly don't see any cryptocurrency being used as a currency possibly ever
but at least not until it stabilizes in value. You have to look no further
than the real world to see what happens with unstable currencies. In countries
like Venezuela for example a secondary economy forms around something stable
like the US dollar.

The big problem with cryptocurrency is one of the things that many advocates
claim as an advantage: there's no central bank who can affect the money
supply. As much as people might, say, criticize the Fed for QE policies and
central banks in general for "printing money", these things are actually
necessary.

Bitcoin (et al) are like "digital gold". Gold as a currency had its place but
there are huge problems with it and good reasons why the world went the way of
fiat currencies.

So I see these coins being used ephemerally. For example: seller converts USD
to BTC, spends that BTC on something. The seller immediately converts it back
to USD so neither party has a holding period of BTC as there's too much risk
attached.

That's all fine and there are definitely use cases for that. Unfortunately
many of them are illegal so even though the tech is agnostic to such things,
illegal uses are and will continue to be a big driver in cryptocurrency usage.
This too will hurt widespread adoption.

As for the stellar rise in Bitcoin, I do think it will settle at some point
for this reason: there has been a proliferation of other coins. At some point
people are going to realize that these are interchangeable so you can just use
whichever one you need to (again, ephemerally). New coins will fill the demand
and they'll simply become another commodity.

Maybe that's the solution to the central bank problem.

Still, I can't help but wish I'd bought some Bitcoin at some point.

~~~
abrkn
As someone who gets paid in Bitcoin and only has Bitcoin I can explain how it
works.

I make purchases using Bitcoin or credit cards. I then sell enough Bitcoin to
pay the credit card bills.

~~~
jnordwick
When you buy a pizza for $20 when does the FX transaction happen, at purchase
time or at the time you pay your credit card bill?

I would hate to be on the hook for btc denominated loan.

~~~
abrkn
When I pay my credit car bill. With my San Francisco software engineer salary
the FX risk of that $20 is acceptable.

------
Kazamai
Someone care to explain how forks / clone coins are not the same as money
printing. The motivation behind them are the same. Greed. I would have
imagined the value of Bitcoin would have went down a lot after every copy

------
heifetz
Can someone explain why bitcoin should be worth more than any of its forks, or
any of the other cryptocurrencies? It feels to me that if anyone can fork
bitcoin and create a parallel currency then I don't see why bitcoin should be
valued differently, other than if people feel that it is much more "useful".
But even in that case, vendors and trading markets will support multiple
currencies. It seems to me that bitcoin might be useful as a conduit for
transactions, but not as a store of value.

~~~
craigc
This same question could be asked about many technology startups.

Why should Uber be valued higher than Lyft?

That's a pretty crude comparison, but I'm just pointing out that just cause
someone comes along and makes a clone of something doesn't mean it will be
worth more than the original even if it is technologically superior.

It's true that forking a cryptocurrency required much less work than starting
a company, but I don't think that the value comparison is that different.

If people believe Bitcoin should be valued higher than a clone of Bitcoin even
if the clone is better, Bitcoin will be valued higher.

~~~
heifetz
except that Uber and Lyft are operating companies with revenue, expenses and
earnings. Bitcoin is a "currency" without inherent value, or cashflow
potential. I admit, Bitcoin may have some utility, but is that utility any
different from another cryptocurrency? To rephrase my question, if someone was
able to clone Gold, why should Gold be worth more than the clones?

~~~
tom_mellior
> Bitcoin may have some utility, but is that utility any different from
> another cryptocurrency?

Yes. It's easier to find shops that accept Bitcoin than it is to find shops
that accept other cryptocurrencies. That's the utility: Being able to use it
to buy stuff.

This utility is not because Bitcoin made superior technical choices, it's
simply due to first mover advantage and network effects. If every place that
accepts Bitcoin today started accepting other cryptocurrencies, Bitcoin would
be likely to lose against those with higher transaction capacity and
cheaper/more transparent fees.

------
sigsergv
Unfortunately, if (or when) bitcoin crashes while being on top valuation it
will dramatically harm the idea of blockchain as a technology. It's too bad
that bitcoin usually associates with blockchain.

------
jraedisch
Could a psychological problem of Bitcoin actually be, that there are not
enough of them, so that to own a single one is too expensive?

I know that you can buy fractions, but somehow it does not feel right to buy
0.2347 Bitcoin, and I actually heard people say that they are buying virtually
any other Coin because it is cheaper. It is not rational, but nonetheless it
is happening.

------
Kazamai
If you are holding now then I would be worrying about how to get it all out in
cash a.s.a.p

------
ganoushoreilly
Non-Paywall version (archive.is)

[https://archive.fo/4xW6A](https://archive.fo/4xW6A)

------
ptero
Is there a non-paywall version?

~~~
bradbatt
Use incognito mode and you should be able to read it.

~~~
ameister14
or a vpn, if it comes to that

------
brndnmtthws
Frankly I'm astounded by the vitriol toward Bitcoin on HN. Bitcoin has the
potential to actually change the world (unlike most of the BS startups coming
out of SV), and yet all these voices on HN poo-pooing Bitcoin appear (to me at
least) to outweigh those who are willing to give it a shot.

Why is this? Do people fear what they don't understand? Are they mad because
they feel like they missed out? Does Bitcoin's success mean their loss (like
the banking folks and the government establishment)?

Did people hate the internet this much in its early days?

~~~
beefield
The problem is that it has potential to change world for the worse, not the
better. Fixed supply monetary systems have been tried in the history and there
are reasons other than evil bankers wanting to get power for their dismissal.

And claiming that bitcoin's success would be bankers loss indicates that you
don't quite get what is the utility finance sector creates. One of the main
things banks do is they convert short term deposits to long term loans. There
is _nothing_ in bitcoin that reduces the need for that service in our economy.
There were banks at gold standard times and there will be banks in the
extremely unlikely world where bitcoin is main currency in a society.

There is no mechanism in bitcoin that would manage the volatility of the
currency (against the price of bread and butter, not other currencies) That in
itself makes it DOA as a proper currency. Further, even if that was sorted out
and a society would want to have bitcoin as their currency, why the f*ck
(pardon my french) the society would want to give the seignorage to bunch of
cryptonerds? It is not like it is difficult to make a fork.

I am not mad about missing one more tulip bubble/ponzi scheme. I am mad that
people never seem to learn.

Modern money is debt. It is a marker who in the society is owed and how much.
Thinking that those markers should have fixed supply is just not smart.

~~~
omio
Bitcoin may be a finite supply but cryptocurrencies in general are infinite.
So can you really say it is a fixed monetary system?

~~~
beefield
Each one of the cryptocurrencies I have encountered relies on the idea that
the supply is somehow predefined.

Give me a cryptocurrency whose supply is adjusted based on the needs of their
users and I am interested. Give me a cryptocurrency that allows heavily
negative interest rates for savings to embrace current consumption in the
economy over hoarding of "money" and I am interested. But these are complete
anathema for the current cryptocurrency folks.

~~~
omio
It can be done easily. I would say it will be done in the future by
governments and forced on us. The amount of control a government would have
with a forced cryptocurrency is the only problem I see.

~~~
beefield
Yes, easily if it is made by government. But if you wanted to do that without
government help enforcing things bit in a distributed manner, I find it a bit
more difficult.

------
bigtimber
dang, another paywall

------
kapauldo
"People are not buying Bitcoin because they intend to use it in their daily
lives." This is why it's a bubble.

------
_superposition_
Money is what you pay taxes with. Period. At the end of the day, that's
controlled by the government.

~~~
_superposition_
Love the down votes, but I'd love more to see an example where this is not the
case?

------
patrickg_zill
The Economist is owned by the Rothschild concern; just wondering if everyone
knows this.

