3 ms·

It's a classic speculative bubble. People are making bets to position themselves for a situation where Bitcoin will be worth a lot in the future, but the valuat

It's a classic speculative bubble. People are making bets to position themselves for a situation where Bitcoin will be worth a lot in the future, but the valuation is untethered from any intrinsic value. The surge becomes self-sustaining, in that as news stories of easy wealth spread and more speculators bundle into the market, it fuels more demand from new participants looking to get rich quick. This is not sustainable in the long run, and as soon as the crowd gets spooked all the dumb money will bail out very quickly, leading to a very fast crash. The Gladwell book "The Tipping Point" is a good read about how ideas and fads take hold in societies. It's more a function of the way information spreads than about any secret knowledge about Bitcoin. Nobody can predict the future, but Bitcoin speculation is an attempt to gamble on it. There's an investment adage that's something like "When your barista's telling you to invest in something, it's time to get out". Have had a number of non-tech/non-finance friends ask about how to invest money into Bitcoin lately, which is a signal to me that Bitcoin is becoming dangerously overheated. Take a look at http://static4.businessinsider.com/image/515b40886bb3f7bd49000013-620-/screen%20shot%202013-04-02%20at%204.29.11%20pm.png http://static4.businessinsider.com/image/515b40886bb3f7bd490... from the South China Seas bubble in the 18th Century. The first half of that curve look familiar? Guessing we will see a lot of Newtons in the not so distant future... (Still, I have some crypto as part of my investment portfolio, about 2% of my net worth... you never know...)

danielharrison 9y ago
I'm not sure if a South China Sea bubble in the 18th century can really be used as a valid comparison here. We're talking about the rise of a self-contained, decentralised currency and transactional system, all rolled into one. It literally has blatant potential to be a game changer, 100%. In saying that, I wouldn't be surprised if it all falls apart in the short term.
- graeme 9y ago
  British trade in the 1700-1800s was a big deal too. Didn't mean people made money from the bubble company. Few revolutiinary technologies generate sizeable returns overall. Railroads and airplanes are a classic example of technologies that changed the world and produced poor-to-negative returns.
- garethsprice 9y ago
  There is a direct and educational correlation that can be drawn between South China Seas, tulip bulbs, stocks in 1929, dotcom stocks, Beanie Babies, subprime housing, Bitcoin, etc. Time and time again some financial instrument has become unmoored from it's intrinsic value and lax regulation allows speculative money to pour in, some early adopters get rich, the financially naive jump on the bandwagon without understanding the underlying instruments, they get spooked and the entire thing plummets back to it's fundamental value (which may well be zero) leaving some with fortunes and some with nothing. Bubbles appear to be a natural occurrence in a lightly regulated market economy and typically follow a very similar pattern. I think that Bitcoin can be both a speculative bubble and a potentially world-changing technology. The dotcom bubble is a fine prior example - huge classic speculative bubble, also radically changed how we are all now living.
gt_ 9y ago
Define 'intrinsic value' though. I don't think shininess counts.
- Spivak 9y ago
  I'll give it a shot. The intrinsic value of a good is the value of the utility it provides. For BTC this would be the value as a payment network and a means of facilitating transactions. Its value as an investment would not count.
  - sprobertson 9y ago
    > Its value as an investment would not count. Why not?
    - graeme 9y ago
      If you buy a business, it will generate wealth. If you buy a bitcoin, it will generate....what, precisely? Gold is often used as a comparison, but gold doesn't generate anything either. And gold will generally lose value compared to an investment in a productive asset.
      - eswat 9y ago
        > Gold is often used as a comparison, but gold doesn't generate anything either. And gold will generally lose value compared to an investment in a productive asset. And I don’t understand why we have this gold comparison. Compared to a productive asset, gold won’t be generating any value. But gold’s value in the first world is at least somewhat in lockstep with inflation, where Bitcoin is all over the place and can’t be used as a hedge like gold can.
literallycancer 9y ago
If you are reasonably sure that it's a bubble, you should be shorting, right?
- garethsprice 9y ago
  Shorting a bubble also involves timing the peak and decline, I don't feel confident in my ability to do that (or anyone's tbh). I'm not knowledgable enough about Bitcoin markets or how shorting works to make a rational decision - it'd be a pure bet. First time round I got into Bitcoin and was able to time the peak right (by luck) and made enough for a few nice dinners, should've held onto them though. This time my strategy is just to buy and hold - my hypothesis being that there is a small chance Bitcoin/crypto will form the basis of a new economic mode - if it isn't and it crashes to zero, I'm only in as far as I can lose my stake completely (or lose my nerve and cash out what's left which is also highly likely). I am a very boring and amateur investor. I am the dumb money :)

danielharrison 9y ago

I'm not sure if a South China Sea bubble in the 18th century can really be used as a valid comparison here. We're talking about the rise of a self-contained, decentralised currency and transactional system, all rolled into one. It literally has blatant potential to be a game changer, 100%. In saying that, I wouldn't be surprised if it all falls apart in the short term.

graeme 9y ago
British trade in the 1700-1800s was a big deal too. Didn't mean people made money from the bubble company. Few revolutiinary technologies generate sizeable returns overall. Railroads and airplanes are a classic example of technologies that changed the world and produced poor-to-negative returns.
garethsprice 9y ago
There is a direct and educational correlation that can be drawn between South China Seas, tulip bulbs, stocks in 1929, dotcom stocks, Beanie Babies, subprime housing, Bitcoin, etc. Time and time again some financial instrument has become unmoored from it's intrinsic value and lax regulation allows speculative money to pour in, some early adopters get rich, the financially naive jump on the bandwagon without understanding the underlying instruments, they get spooked and the entire thing plummets back to it's fundamental value (which may well be zero) leaving some with fortunes and some with nothing. Bubbles appear to be a natural occurrence in a lightly regulated market economy and typically follow a very similar pattern. I think that Bitcoin can be both a speculative bubble and a potentially world-changing technology. The dotcom bubble is a fine prior example - huge classic speculative bubble, also radically changed how we are all now living.

gt_ 9y ago

Define 'intrinsic value' though. I don't think shininess counts.

Spivak 9y ago
I'll give it a shot. The intrinsic value of a good is the value of the utility it provides. For BTC this would be the value as a payment network and a means of facilitating transactions. Its value as an investment would not count.
- sprobertson 9y ago
  > Its value as an investment would not count. Why not?
  - graeme 9y ago
    If you buy a business, it will generate wealth. If you buy a bitcoin, it will generate....what, precisely? Gold is often used as a comparison, but gold doesn't generate anything either. And gold will generally lose value compared to an investment in a productive asset.
    - eswat 9y ago
      > Gold is often used as a comparison, but gold doesn't generate anything either. And gold will generally lose value compared to an investment in a productive asset. And I don’t understand why we have this gold comparison. Compared to a productive asset, gold won’t be generating any value. But gold’s value in the first world is at least somewhat in lockstep with inflation, where Bitcoin is all over the place and can’t be used as a hedge like gold can.

literallycancer 9y ago

If you are reasonably sure that it's a bubble, you should be shorting, right?

garethsprice 9y ago
Shorting a bubble also involves timing the peak and decline, I don't feel confident in my ability to do that (or anyone's tbh). I'm not knowledgable enough about Bitcoin markets or how shorting works to make a rational decision - it'd be a pure bet. First time round I got into Bitcoin and was able to time the peak right (by luck) and made enough for a few nice dinners, should've held onto them though. This time my strategy is just to buy and hold - my hypothesis being that there is a small chance Bitcoin/crypto will form the basis of a new economic mode - if it isn't and it crashes to zero, I'm only in as far as I can lose my stake completely (or lose my nerve and cash out what's left which is also highly likely). I am a very boring and amateur investor. I am the dumb money :)