Is Bitcoin / Blockchain A Bubble?

Alex Waters
Dec 17, 2017 · 4 min read
Image for post
Image for post

My friend Pete told me that some economists have negative things to say about Bitcoin recently. So I googled it and found this:

I’m a skeptic — I want to hear from perspectives which support the argument that Bitcoin / Blockchain is rubbish.

I’m an engineer — I want people to tell me it’s broken so that I can try to think of solutions.

So I’m going into this thinking: OK this could give me some great food for thought — it will challenge my perceptions and I might learn some new information.

Image for post
Image for post

“It’s a utility token for criminals, terrorists, money launderers, tax evaders”

Dang it.

Those are juicy news headlines — but a few years ago when Silk Road was at its peak — I found some empirical data. Illicit transactions made up roughly 8-13% of retail transaction volume based on network analysis at that time. That’s significantly less than the percentages attributed to $USD black market activity (roughly 20% of payments volumes).

Bitcoins are primarily used for a few things:

  1. The ability to record messages / scripts in a giant public ledger.
  2. Speculation that #1 will have long-term value. Hodl.
  3. A store of value / wealth preservation instrument that is significantly different in structure than fiat, equities, and precious metals.
  4. Cross-border payments. Fees are lower for migrant labor remittances and ease of use cases exist in regions with capital controls.
  5. It is a highly liquid investment instrument and a highly efficient payment instrument at least regarding ICOs.

Those are a few examples. The PITA will likely point to ICOs as a red herring… that’s fine — they’ll get it eventually.

That list doesn’t even delve into the vast potential use cases for a Blockchain. Where we still don’t know how many industries it will affect and to what extent. I’m just talking about the bitcoin blockchain’s unit of account BTC — and some of its uses right now.

“It’s clearly a bubble — it looks like the second biggest bubble in history after tulip mania. Although at the rate it’s going it will pass tulip mania, you know, in a matter of days.”

The irony of this situation is the extent to which there is a mania surrounding the myth of “tulip mania”. It’s a story that continually gets referenced as some boogey man — but in actual history — it didn’t happen the way it’s portrayed.

Academic historians dismissed this myth a few years ago (link).

“Most of what we have heard of [tulipmania] is not true.”

Anne Goldgar Professor of early modern European history, King’s College London.

Even if there were a bubble around tulip bulbs in the 17th century Dutch Republic; there isn’t enough data in the historical record to construct the notion or inference that it was the biggest bubble in history.

What a giant leap of logic to then conclude that Bitcoin is #2. Based on what? Trading volume? Some future market crash?

I’m pretty sure that the 2008 subprime mortgage derivative instrument / rehypothecation crisis was a larger systemic risk than Bitcoin is today.

Economist Jim Rickard’s argument is a bubble.

Image for post
Image for post

The interview goes on and a couple other mis-truths are espoused about Bitcoin and the exchanges on which it trades… my favorite: “there are no regulators”.

The article has about 35,000 fire symbols — whatever that means. I guess it is popular.

I generally think the current price movement is pretty aggressive — maybe even illogically exuberant. Is it a bubble? I have no idea.

What does bubble mean?

I hear people reference the late 90s dot-com bubble as some kind of warning. Yet here we are using the internet.

Fidget spinners? Probably overpriced AND the underlying asset probably doesn’t have long-term value. That’s just my opinion. I’m not a fidget spinner expert.

Image for post
Image for post

This is an important distinction.

I’m saying — even if Bitcoin prices are a “bubble” — does that make Bitcoin any less interesting / valuable in the long-term?

To me it just means that the price might not accurately track the value of the current ecosystem.

In the case of the 90s “dot-com bubble” — sure the price crashed. But Apple, Google, and Microsoft are the most valuable companies in the world today.

From a computer science standpoint: there is no question in my mind that Blockchains and Bitcoin have a bright and lengthy future.

Does the price of $20,000 for 1.0 BTC accurately track its value?

Who knows.

I wish people would stop acting like they have total information and using it as a platform to preach false gospel.

It’s as if experts do not understand a deeply technical and conceptually complex ecosystem that is outside of their domain expertise — so they call it a bubble.

Hey experts, try this instead:

I don’t know. — Alex Waters

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store