Is Bitcoin / Blockchain A Bubble?

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.

“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.

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.

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

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