Saturday, April 7, 2018

Bitcoin and the B-word

It's not hard these days to find a chart comparing the price of Bitcoin to the NASDAQ from the dotcom bubble.  They line up pretty well, provided you stretch the time scale of Bitcoin out considerably on the way up and somewhat less considerably on the way down.  Whether this means Bitcoin is actually in a bubble is something we don't know just yet.  Bubbles are only referred to with certainty in past tense: "That was a bubble".

There are arguments on either side.  One that I don't buy is "The last time Bitcoin fell by X amount, it later rose by way-more-than-X amount."  That's nice, but I'd kinda like to see a mechanism, not just numbers.  There aren't that many 10X jumps left before Bitcoin is literally all the money in the world (I do realize that that's the endgame if you're a hardcore cryptocurrency advocate).  There are interesting questions about just exactly how that would happen, but what happens after that?  What does it mean for Bitcoin to appreciate another 10X over the dollar if there are no more dollars?

Presumably at some point BTC rising against the dollar no longer means that Bitcoin is becoming more valuable in terms of the goods and services a Bitcoin can purchase, but that the dollar is becoming less valuable in real terms until it finally goes away.  How we get hyperinflation in a currency whose supply is going to zero is an interesting question.  I'm not sure there are any historical precedents here.  When the major currencies went off the gold standard in the 20th century, gold was still there and still had value.  If dollars go away entirely then at some point we're dividing zero by zero, which can come out to any number you like.

But, for the Nth time in drafting this post, I digress down a rabbit hole of speculation over Just What Does It All Mean.  The question I wanted to address here is, "Is Bitcoin in a bubble?"

But I already answered that.  One of the defining properties of a bubble is you don't know for sure if you're in it.  It's possible, at least in principle, that the price of Bitcoin could stabilize in some fairly tight range, and if that range isn't too far off the top (somewhere north of $19K) then we had some wild fluctuations, but not a bubble.  If it keeps falling toward zero, even if it eventually stabilizes around $1000, or $100, or $10 or whatever, then I think you'll have to say we had a bubble.

Does it matter?

I'd say not really.  If you're trading BTC, the important part is how you came out.  You might have made a lot of money, or lost it, or even both, but you can do that trading blue chips on the NYSE (How do you make a small fortune on Wall Street?  Start with a large one.)  If you're interested in Bitcoin as a store of value or a payment system or whatever, then what matters is whether that comes to pass, not the exact price of BTC when that may happen.

People throw around terms like "correction", "crash" or "bubble collapse" mainly, I think, to express an opinion about what's going to happen, not what has.  A correction implies that things got a bit out of hand but everything will be fine in the long run.  A crash means prices fell far and fast, but doesn't really say anything about the future.  A bubble collapse says that not only did prices fall, but there was much less ever there than people thought at the time.  If prices ever do recover, it won't be for a good long time, and for much different reasons than drove the runup to the bubble bursting.  Which of those is happening now depends on who you ask (though it's hard to call a 60%+ drop off the top a correction with a straight face).

I think that, along with the previous post, is about all I want to say about Bitcoin for a while.  I note that it's been a prevalent topic here for a while -- not that I've been posting that much on anything here -- and there's got to be other web.stuff to talk about.

No comments: