Are We In a Bitcoin Bubble?

So, are we in a Bitcoin bubble? After it all, as of this writing, one Bitcoin is worth over $4,400 — which is about 8x what it was worth just one year ago.

However, let’s consider what we’re asking here. What is a bubble, really? Wikipedia defines it as following:

An economic bubble or asset bubble is trade in an asset at a price or price range that strongly exceeds the asset’s intrinsic value — Wikipedia

It seems that in order to determine if the Bitcoin market is indeed in a bubble, we will need to determine if its price exceeds its intrinsic value. There’s only one problem: There isn’t one.

This is not a bad thing, mind you. I’m not writing this because I think Bitcoin is worthless. I’m simply pointing out the fact that Bitcoin’s value exclusively stems from people’s belief in its value.

Let’s look into that. The definition above refers to intrinsic value. What is that?

intrinsic value refers to the value of a company, stock, currency or product determined through fundamental analysis without reference to its market value — Wikipedia

So, how do you do fundamental analysis of Bitcoin?

It produces no cash flows.

It correlates to no real-world activity.

It is not used, by and large, in visible global trade.

It is not tied to any country’s economy or printed by a central bank.

This all means that Bitcoin is not bound by constraints we can perform fundamental analysis on. Consider other asset classes for which we have experienced bubbles — for instance, stocks or commodities. A stock is a piece of ownership in a company, and you can evaluate it based in the future cash flows from that asset. Commodities such as oil or coffee have real-world uses and alternatives.

But for Bitcoin? There are simply no fundamentals to analyze.

Note that saying “this is not a bubble” is not the same as saying “the Bitcoin market is not going to crash tomorrow”. Humans are fickle, especially as a collective. Crypto-currencies have proven to be very volatile assets thus far. The market is still relatively small in absolute terms and as such — it is vulnerable to manipulation by big players.

However, once again, one cannot determine if we’re in a Bitcoin bubble or not, since there are no fundamentals to analyze. Sure, psychology of the crowds, technical analysis, or your esoteric method of choice may be telling you exactly where Bitcoin’s price is going. If so, I wish you good luck and many fortunes!

Just don’t say we’re in a bubble.

Photo credit: Brocken Inaglory, Wikimedia Commons