Bitcoin Is Not A Bubble

Over the past few years, I’ve noticed that people tend to predict that Bitcoin is a bubble, and then later suggest that a subsequent price drop shows that it was a bubble. Thus lots of pundits said Bitcoin was a bubble when its price was at $30. Then when it was at $300, even more, suggested that it was a bubble. Each time the price plunges they say “I told you so.” Now the price of Bitcoin is over $3300, and even more, people are saying it was a bubble.  Noah Smith has a new piece in Bloomberg:

Yep, Bitcoin Was a Bubble. And It Popped.

His main piece of evidence is that the price rose sharply and then fell sharply. But that sort of price pattern also occurs in 100% efficient markets that are highly volatile because the fundamental value of the asset is hard to ascertain. And if there ever was an asset with a value that is difficult to ascertain, it’s Bitcoin. I have no clue as to what Bitcoin should be worth, and I doubt anyone else does either.

Bubble theories are only true if they are useful, and they are not useful. The people who said it was a bubble at $30 were implicitly giving you advice not to buy. Ditto for those who said it was a bubble at $300. This advice was exceedingly non-useful; in fact, if you followed the advice of bubble proponents you missed out on the opportunity to earn a massive profit investing in Bitcoin. That’s why I don’t follow the advice of bubble theorists; it’s not useful. BTW, I don’t own Bitcoin for unrelated reason; I prefer index stock (or bond) funds.

In any efficient asset market with an extremely volatile price, the current value of the asset will usually be far below the historical maximum price. That’s equally true if bubbles don’t exist. BTW, I define a bubble as a price that is clearly too high relative to fundamentals, and thus an asset with a poor expected return, based on rational analysis.  In fairness, Noah Smith defines it differently:

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