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Ask HN: How do we know Bitcoin is not in a bubble?

28 points by tbirrell 9y ago

Bitcoin's rise has been astronomical in the last year or so. How do we know that this isn't a bubble that will bankrupt 95% of its users?

detaro 9y ago
we don't.
- myst 9y ago
  We even know it is a bubble.
eabrams 9y ago
As a fiat currency, it is almost by definition a bubble. It's fundamental value is essentially nil, yet it's "price" is positive. In the current equilibrium, people seem to agree that Bitcoin is a good store of value (because it is perhaps limited in supply and ownership is verifiable). Fortunately/unfortunately, other cryptocurrencies are just as useful in this regard. As such, Bitcoin's value is something of a sunspot equilibrium. Any sufficiently big shock or event could shift the focus to another cryptocurrency or other product entirely.
- neilwilson 9y ago
  "It's fundamental value is essentially nil," That's not strictly true. It's fundamental value is the effort required to obtain it - which at the moment is some rather large amount of electricity and hardware. If you have deployed those resources you will not let the Bitcoins go for any less in real exchange unless you absolutely have to. That is the same for anything that is a currency. It's base value is what you have to do to get it. The problem with crypto-currencies is that nobody has to hold them to deliver them anywhere. There is no solid drain other than to savings.
  - RyanCavanaugh 9y ago
    You've confused fundamental value with fundamental cost. A hand-knit sweater will not necessarily (or even usually) fetch a selling price equal to the input value of the labor that went into it. There are many endeavors which produce goods whose market-clearing price is below the value of effort required to produce them.
    - mywittyname 9y ago
      Houses are a good example. When land is plentiful, the cost of a house is usually a slight discount over what it would cost to build a similar one for new.
  - SHOwnsYou 9y ago
    Your first paragraph basically describes the sunk cost fallacy. People have put money in, so they will make sure the value doesn't drop below their investment.
  - SamPatt 9y ago
    This is the labor theory of value and proven wrong. All value is subjective.
- simple10 9y ago
  Bitcoin is technically not a fiat currency. Fiat currencies are established by governments and are inflationary in nature since the governments can print more money whenever they feel like it. Bitcoin is deflationary and more like digital gold since the supply is limited. Bitcoin could end up a popped bubble if Tether[1] loses adoption. [1] http://fortune.com/2017/12/05/bitcoin-btc-price-usd-tether-limited-bitfinex/ http://fortune.com/2017/12/05/bitcoin-btc-price-usd-tether-l...
coryl 9y ago
It probably is a bubble. The problem is when it bursts, we don't know if we'll be in better positions having entered now, or having entered after.
Avalaxy 9y ago
It very obviously is. Nothing can grow at such an insane rate and be a stable, long-lasting thing. No one knows how high it will go, but that it will collapse hard soon is 100% sure.
- Rmilb 9y ago
  If you are certain it will collapse you can make a lot of money shorting it. If you are 100% sure, there is no downside.
  - neilwilson 9y ago
    Generally the problem with shorting is that the shorts are time limited - because it is a derivative bet, not a proper loan. And following Keynes the market can stay irrational longer than you can stay solvent.
  - soneca 9y ago
    What financial mechanisms exist to short Bitcoin?
    - mancerayder 9y ago
      Here's an idea. Ethereum smart contracts to short bitcoin. You borrow my BTC for 30 days, with a 5% fee. Someone could make a killing off of that idea.
      - colecut 9y ago
        This is more of a general purpose app, but would work. https://gofreakingdoit.com/ https://gofreakingdoit.com/
      - chrdlu 9y ago
        https://medium.com/dydxderivatives/introducing-dydx-2d0f0f326fd https://medium.com/dydxderivatives/introducing-dydx-2d0f0f32... Note: I'm not affiliated with that project, but I did see them present yesterday at Token Summit and it looked very interesting!
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Sol-Savage 9y ago
I wonder how bitcoin will look in the aftermath of other technological novelties. Usually, these things start off as a niche novelty of an insular crowd, then savy people take part, then it goes mainstream and the influx of traffic forces regulation and more overhead due to demand. The drivers of the technology leave, then there's a slow burnout time where people try to maintain the appearence that the tech isn't dying.
soulchild37 9y ago
This chart might serve as a good indicator : http://charts.woobull.com/bitcoin-nvt-ratio/ http://charts.woobull.com/bitcoin-nvt-ratio/ , similar to stock market P/E Ratio, it uses NVT Ratio (Network Value to Transactions Ratio).
ggg9990 9y ago
You can't know that it's not a bubble. Maybe it is and crashes tomorrow. Maybe it is and crashes in a year. Maybe that crash brings it back to fundamentals but that price is still higher than it is today. If you could perfectly predict the future you'd be pretty much God.
gnode 9y ago
Such price increases may be simply a bubble (possibly a temporary bubble as we've seen in the past), but they may also be a sudden price adjustment. One explanation for such a price adjustment is an increase in the number and wealth of its users. The user base has moved from crypto enthusiasts to wealthy individuals, and now it seems to institutional investors with bitcoin futures going ahead. Such a thing didn't exist before 2009, so we don't have much to go on as far as how valuable it'll be. Cryptocurrency may not be pinned in value to anything tangible, but is useful and unique as an asset class for its ability to transfer ownership by virtual means. You can't store a bar of gold in your memory, and you can't send it through a computer. I believe its long term value is in how much people want money that has this property. Long term, a threat to Bitcoin's value is competing altcoins. Bitcoin is arguably a bad cryptocurrency at a technical level (high transaction fees, slow transactions, bad for the environment, etc.), it's difficult to use for commerce, but seems to be winning out against the others for now, maybe just by first mover advantage and established network effect.
zaptheimpaler 9y ago
We only know bubbles in hindsight. No one can say for certain.
captainmuon 9y ago
You can't know. For those who are saying it is obviously a bubble: If bitcoin "succeeds" and becomes widely used as money, then its value will grow a lot more, since there can only ever be 21 million bitcoins. It is inherently deflationary. One bitcoin is worth, roughly (and circularly) speaking, the total valuation of bitcoin divided by the number of coins. Another way of looking at it: imagine bitcoins become as widespread, and as desired, as USD. Now think about how many USD are in circulation compared to BTC. I know it is not really that simple, and dollars have some special properties compared to bitcoin: you have to pay your US taxes in USD, for example. Also, it is easy to talk about "valuation" (in e.g. USD, EUR) if you view bitcoin as a commodity - but if it becomes a dominant currency it is not so simple. You can still reason about exchange rates, and my point is, the asymptotic exchange rate USD:BTC (assuming no dollar inflation) is not of the order of 10000:1, but much higher, maybe 1000000:1.
- rmah 9y ago
  Bitcoin cannot become "widely used money". It is technically impossible. It is transaction rate limited to 6 txn/sec. Worldwide. Even band-aids such as increasing the block size won't help enough. I'm not saying bitcoin prices will crash anytime soon. Simply that the dream of bitcoin replacing fiat currencies in daily commerce is just that: a dream.
  - ericb 9y ago
    It was once impossible to stream movies over the internet because modem technology was limited to 1200 bits per second. Even band-aids like doubling capacity wouldn't help enough. Technically. Impossible.
    - take4 9y ago
      Streaming movies was impossible over dial-up, and still is. But you can if you have different internet connections like DSL, Cable, Fiber, etc. For the original bitcoin that is currently being priced at $13,000 it is indeed technically impossible to exceed 6 transactions per second. Sure you could make a new crypto protocol, but it's not "bitcoin".
rednerrus 9y ago
When you look into bitfinexed articles regarding the Tether pump and dump and wash trading, you would be crazy to think the value of Bitcoin is sustainable.
age_bronze 9y ago
The question should be, what should happen so that it stabilizes. If Bitcoin and cryptocurrency marker were to stabilize, the competition between different cryptocurrencies should mean the trade off between their different features will be directly reflected in the cost to their user. The possible features are: - Transaction time (Bitcoin is relatively bad here) - Transaction fee (Bitcoin is also one of the worst options here) - Smart contacts / other integration features (Bitcoin is going nowhere here) - Anonymity (Bitcoin isn't in the best spot here, might have the advantage of being the most commonly used BUT this is a matter of momentum only). - Resistance to attacks from large groups of people (Bitcoin's biggest advantage, but again only a result of it's initial momentum, which might not hold forever). Now you can also notice that all these features are composite. If you really want to pay for anonymity, you can tumble though the most anonymous currency. If you need smart contacts, go through eth. Resistance to nation state attack is a noble ideological concept, but has low demand, and a cheaper but weaker coin will be dominant in most scenarios. You will also know a market is stabilized when there no incentives to create competition without innovating. There's nothing stopping you from creating yet another crypto coin, which will have better transaction fee and will still be as decent as others. Anyway you can clearly tell the market is clueless when the talk isn't about which coins gives you the best features for the most cheap price, but instead about which coin rises the most (which is usually exactly the opposite).
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28 points by tbirrell 9y ago

Bitcoin's rise has been astronomical in the last year or so. How do we know that this isn't a bubble that will bankrupt 95% of its users?

detaro 9y ago

we don't.

myst 9y ago
We even know it is a bubble.

eabrams 9y ago

As a fiat currency, it is almost by definition a bubble. It's fundamental value is essentially nil, yet it's "price" is positive. In the current equilibrium, people seem to agree that Bitcoin is a good store of value (because it is perhaps limited in supply and ownership is verifiable). Fortunately/unfortunately, other cryptocurrencies are just as useful in this regard. As such, Bitcoin's value is something of a sunspot equilibrium. Any sufficiently big shock or event could shift the focus to another cryptocurrency or other product entirely.

neilwilson 9y ago
"It's fundamental value is essentially nil," That's not strictly true. It's fundamental value is the effort required to obtain it - which at the moment is some rather large amount of electricity and hardware. If you have deployed those resources you will not let the Bitcoins go for any less in real exchange unless you absolutely have to. That is the same for anything that is a currency. It's base value is what you have to do to get it. The problem with crypto-currencies is that nobody has to hold them to deliver them anywhere. There is no solid drain other than to savings.
- RyanCavanaugh 9y ago
  You've confused fundamental value with fundamental cost. A hand-knit sweater will not necessarily (or even usually) fetch a selling price equal to the input value of the labor that went into it. There are many endeavors which produce goods whose market-clearing price is below the value of effort required to produce them.
  - mywittyname 9y ago
    Houses are a good example. When land is plentiful, the cost of a house is usually a slight discount over what it would cost to build a similar one for new.
- SHOwnsYou 9y ago
  Your first paragraph basically describes the sunk cost fallacy. People have put money in, so they will make sure the value doesn't drop below their investment.
- SamPatt 9y ago
  This is the labor theory of value and proven wrong. All value is subjective.
simple10 9y ago
Bitcoin is technically not a fiat currency. Fiat currencies are established by governments and are inflationary in nature since the governments can print more money whenever they feel like it. Bitcoin is deflationary and more like digital gold since the supply is limited. Bitcoin could end up a popped bubble if Tether[1] loses adoption. [1] http://fortune.com/2017/12/05/bitcoin-btc-price-usd-tether-limited-bitfinex/ http://fortune.com/2017/12/05/bitcoin-btc-price-usd-tether-l...

coryl 9y ago

It probably is a bubble. The problem is when it bursts, we don't know if we'll be in better positions having entered now, or having entered after.

Avalaxy 9y ago

It very obviously is. Nothing can grow at such an insane rate and be a stable, long-lasting thing. No one knows how high it will go, but that it will collapse hard soon is 100% sure.

Rmilb 9y ago
If you are certain it will collapse you can make a lot of money shorting it. If you are 100% sure, there is no downside.
- neilwilson 9y ago
  Generally the problem with shorting is that the shorts are time limited - because it is a derivative bet, not a proper loan. And following Keynes the market can stay irrational longer than you can stay solvent.
- soneca 9y ago
  What financial mechanisms exist to short Bitcoin?
  - mancerayder 9y ago
    Here's an idea. Ethereum smart contracts to short bitcoin. You borrow my BTC for 30 days, with a 5% fee. Someone could make a killing off of that idea.
    - colecut 9y ago
      This is more of a general purpose app, but would work. https://gofreakingdoit.com/ https://gofreakingdoit.com/
    - chrdlu 9y ago
      https://medium.com/dydxderivatives/introducing-dydx-2d0f0f326fd https://medium.com/dydxderivatives/introducing-dydx-2d0f0f32... Note: I'm not affiliated with that project, but I did see them present yesterday at Token Summit and it looked very interesting!

deleted 9y ago

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deleted 9y ago

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Sol-Savage 9y ago

I wonder how bitcoin will look in the aftermath of other technological novelties. Usually, these things start off as a niche novelty of an insular crowd, then savy people take part, then it goes mainstream and the influx of traffic forces regulation and more overhead due to demand. The drivers of the technology leave, then there's a slow burnout time where people try to maintain the appearence that the tech isn't dying.

soulchild37 9y ago

This chart might serve as a good indicator : http://charts.woobull.com/bitcoin-nvt-ratio/ http://charts.woobull.com/bitcoin-nvt-ratio/ , similar to stock market P/E Ratio, it uses NVT Ratio (Network Value to Transactions Ratio).

ggg9990 9y ago

You can't know that it's not a bubble. Maybe it is and crashes tomorrow. Maybe it is and crashes in a year. Maybe that crash brings it back to fundamentals but that price is still higher than it is today. If you could perfectly predict the future you'd be pretty much God.

gnode 9y ago

Such price increases may be simply a bubble (possibly a temporary bubble as we've seen in the past), but they may also be a sudden price adjustment. One explanation for such a price adjustment is an increase in the number and wealth of its users. The user base has moved from crypto enthusiasts to wealthy individuals, and now it seems to institutional investors with bitcoin futures going ahead. Such a thing didn't exist before 2009, so we don't have much to go on as far as how valuable it'll be. Cryptocurrency may not be pinned in value to anything tangible, but is useful and unique as an asset class for its ability to transfer ownership by virtual means. You can't store a bar of gold in your memory, and you can't send it through a computer. I believe its long term value is in how much people want money that has this property. Long term, a threat to Bitcoin's value is competing altcoins. Bitcoin is arguably a bad cryptocurrency at a technical level (high transaction fees, slow transactions, bad for the environment, etc.), it's difficult to use for commerce, but seems to be winning out against the others for now, maybe just by first mover advantage and established network effect.

zaptheimpaler 9y ago

We only know bubbles in hindsight. No one can say for certain.

captainmuon 9y ago

You can't know. For those who are saying it is obviously a bubble: If bitcoin "succeeds" and becomes widely used as money, then its value will grow a lot more, since there can only ever be 21 million bitcoins. It is inherently deflationary. One bitcoin is worth, roughly (and circularly) speaking, the total valuation of bitcoin divided by the number of coins. Another way of looking at it: imagine bitcoins become as widespread, and as desired, as USD. Now think about how many USD are in circulation compared to BTC. I know it is not really that simple, and dollars have some special properties compared to bitcoin: you have to pay your US taxes in USD, for example. Also, it is easy to talk about "valuation" (in e.g. USD, EUR) if you view bitcoin as a commodity - but if it becomes a dominant currency it is not so simple. You can still reason about exchange rates, and my point is, the asymptotic exchange rate USD:BTC (assuming no dollar inflation) is not of the order of 10000:1, but much higher, maybe 1000000:1.

rmah 9y ago
Bitcoin cannot become "widely used money". It is technically impossible. It is transaction rate limited to 6 txn/sec. Worldwide. Even band-aids such as increasing the block size won't help enough. I'm not saying bitcoin prices will crash anytime soon. Simply that the dream of bitcoin replacing fiat currencies in daily commerce is just that: a dream.
- ericb 9y ago
  It was once impossible to stream movies over the internet because modem technology was limited to 1200 bits per second. Even band-aids like doubling capacity wouldn't help enough. Technically. Impossible.
  - take4 9y ago
    Streaming movies was impossible over dial-up, and still is. But you can if you have different internet connections like DSL, Cable, Fiber, etc. For the original bitcoin that is currently being priced at $13,000 it is indeed technically impossible to exceed 6 transactions per second. Sure you could make a new crypto protocol, but it's not "bitcoin".

rednerrus 9y ago

When you look into bitfinexed articles regarding the Tether pump and dump and wash trading, you would be crazy to think the value of Bitcoin is sustainable.

age_bronze 9y ago

The question should be, what should happen so that it stabilizes. If Bitcoin and cryptocurrency marker were to stabilize, the competition between different cryptocurrencies should mean the trade off between their different features will be directly reflected in the cost to their user. The possible features are: - Transaction time (Bitcoin is relatively bad here) - Transaction fee (Bitcoin is also one of the worst options here) - Smart contacts / other integration features (Bitcoin is going nowhere here) - Anonymity (Bitcoin isn't in the best spot here, might have the advantage of being the most commonly used BUT this is a matter of momentum only). - Resistance to attacks from large groups of people (Bitcoin's biggest advantage, but again only a result of it's initial momentum, which might not hold forever). Now you can also notice that all these features are composite. If you really want to pay for anonymity, you can tumble though the most anonymous currency. If you need smart contacts, go through eth. Resistance to nation state attack is a noble ideological concept, but has low demand, and a cheaper but weaker coin will be dominant in most scenarios. You will also know a market is stabilized when there no incentives to create competition without innovating. There's nothing stopping you from creating yet another crypto coin, which will have better transaction fee and will still be as decent as others. Anyway you can clearly tell the market is clueless when the talk isn't about which coins gives you the best features for the most cheap price, but instead about which coin rises the most (which is usually exactly the opposite).

deleted 9y ago

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