This is now my third post on Bitcoin for the week. And as of this morning, it will cost you $970 to buy a bitcoin (although the price did break the $1,000 barrier on one of the Tokyo exchanges – Mt. Gox – yesterday).
To be clear, that’s a 21% return since I started writing 48 hours ago. And for those of us that like to explore what that return is in annual terms (I am definitely part of that crowd), that’s a simple annual increase of 3,833%. Making it almost worth borrowing money from Wonga.com to buy bitcoins, should things continue as they are going.
The question that is being asked: is this a bubble, or is this a mass monetary conversion?
2013’s Somewhat Fortuitous Nobel Prize for Economics
It just so happens that the clever people at the committee for the Nobel prize made the decision to award 2013’s prize to three gentlemen:
- Eugene Fama;
- Robert Shiller; and
- Lars Hansen
The basis of the award was their individual contributions to the world’s understanding of asset-pricing. Which was a bit of a scandal (as these things go), because Mr Fama and Mr Shiller, in particular, have radically opposing views of the world:
Eugene Fama: is the father of the efficient market hypothesis (along with Mr French: any university student studying finance should be familiar with the Fama & French papers, as I’m yet to meet the finance professor that didn’t have a bit of a man-crush on those two). In Mr Fama’s mind, therefore, there is no such thing as a “bubble”: the price of a share (or any other asset) always reflects the market’s value based on the collective market knowledge of that share or asset. And when you get massive price swings (like bitcoin’s recent ascension), that’s just the direct result of new information entering the market.
Robert Shiller: believes that the Efficient Market Hypothesis is not the universal rule. He likes to use the phrase “irrational exuberance” to describe a market that gets overly excited about houses/shares/whatever. And he believes in market bubbles – where a group of assets (or an asset in particular) experiences a price change that’s more related to mass hysteria than it is related to new information about the asset (for more of an explanation, I wrote about something similar in January this year: Observation Number 5: Efficient Market Hypothesis?).
Which should be a bit helpful in this situation: as the Fama view would require new information in order to explain the price increase.
Bitcoin Over The Last Year: What Has Changed
Here are the important points:
- Bitcoin used to be associated with Silk Road, which was basically the amazon.com of drugs. You could go on there and trade your bitcoins for narcotics (around 70% of the market), although you could also buy books and art if you were into that (I assume that those were items being fenced). And, apparently, hire assassins. Silk Road was shut down by the FBI on October 2; and they arrested Ross William Ulbricht, a 29 year old, as the founder and chief operator. The FBI reported that they seized 144,000 BTC that belonged to him (about $140 million at today’s exchange rate).
- A US Senate committee heard this month that bitcoin is considered “a legitimate financial instrument”.
- In 2013, some mainstream online companies (including WordPress, Reddit and Baidu) started accepting payment in bitcoin. As will the University of Nicosia. According to wikipedia, there are currently around 600 online businesses that will accept payment in bitcoin.
- A few tax authorities (the German and American ones in particular) have started treating bitcoin gains as taxable items (obviously).
To summarise: bitcoin is no longer being used in one of its more significant capacities (as a medium of transaction on underground websites), about 600 companies amongst the millions around have started accepting bitcoin as payment, and a testifier at a senate committee hearing gave an opinion.
I’m just not sure that the information there justifies this:
So maybe the new information could have something to do with general perception? I guess that as more people start to acquire bitcoin, the more willing vendors will be to accept it, the more usable it becomes, the more people will want it, and so on.
But because it’s new, any dramatic shifts in value will likely scare people off.
That is: if the process happens organically, then there’s a chance of success. But if there is an attempt to speculate on the premise that the process will happen organically, then you get an entirely non-organic chain of events taking place. It’s a bit self-defeating, agreed – but my question: when a BTC is trading at above $1000, how is it going to generate mass appeal? Sure, you can talk about millicoins (mBTC = 0.01 BTC), microcoins (μBTC = 0.000001 BTC) and a “satoshi” (0.000000001 BTC) – but humans are not good at dealing with decimal places.
We like whole integers.
So is it a bubble, then?
I’m not a general fan of neck on the line – but why not risk a little humble pie here? After all, it’s not like I’m deviating from my stock-standard position: “invest in productive assets”.
The trouble is: bitcoin is actually a really great idea. I think it works. I think it’s safer than normal money. I would actually prefer to use it as a medium of exchange.
But like many great ideas, it can be ruined by a lack of moderation. And what we’re seeing in that graph up there is a vast amount of speculation: to put it bluntly, no one is buying bitcoins to spend them at Baidu.
And if you’re not convinced, here is a website worth visiting: “blockchain.info’s largest recent bitcoin transactions”. Scroll down to the bottom, to the biggest transactions that have taken place of late. Click on the “addresses” (those would be the bitcoin users), and view their transaction histories.
What you’ll notice is a whole lot of buying a large amount of bitcoin at 00:17 and selling them at 00:41. And if you follow the guy that bought at 00:41, you’ll see him selling an hour later.
That’s a whole lot of buying and selling for big numbers. Looks like a craze to me.
On the plus side – if/when bitcoin crashes, there’s no need for any government bailouts!
Caustic Pop November 28, 2013 at 09:00
I touch on the self-defeating nature of the Bitcoin rally to its long-term ascendancy in this piece:http://www.mises.co.za/2013/05/bitcoin-humble-harbinger-of-monetary-revolution/
Specifically, “The irony is the more valuable Bitcoins become the more likely they would be subject to volatility from speculation and hoarding, not to mention heightened risks of fraud and governmental intervention. These factors not only hamper the confidence users and potential users would have with the currency, but the exchange rate volatility would make it difficult to price in Bitcoin reliably, a major hindrance in using the currency and the prices it imbues for the purposes of economic calculation.”Reply
Jayson November 29, 2013 at 07:13
Thanks for directing me to that article, Gareth! I enjoyed it – although it would be interesting to read an update on your thoughts now that we’re 6 months down the line?Reply
Caustic Pop December 2, 2013 at 11:39
Pretty much the same, to be honest. Bitcoin’s greatest nemesis remains its own “success” in terms of becoming very valuable. Hoarding, speculation, theft, fraud, government attention… In any case, I see now that there’re plenty of other digital “coins” popping up. Ex uno plures indeed 🙂Reply