Bitcoin is the bubble that keeps on giving

As the bitcoin price surged past $13 400 over the last week, an old debate has resurfaced: is it a bubble and will it burst?

Bitcoin was labelled a bubble from its earliest days. The bubble epithet appeared in 2013 when it was just $266, and has been repeated just about every year since then.

It seemed to defy conventional investment understanding. Share values are underpinned by earnings, and bonds by interest payments.

Bitcoin, like gold, has no such underpinning. How, then, do we explain its extraordinary performance as an emerging new asset?

Two factors help explain this:

Its wider adoption, including from large institutional investors; and its relative scarcity (there will only ever be 21 million coins minted).

Fiat currencies such as the rand and the US dollar suffer all the frailties of centrally controlled currencies that have been recorded back to Roman and even Babylonian times.

Rulers who control these currencies just can’t seem to help themselves – they eventually inflate their way into oblivion by printing more coinage, so violating the scarcity principle at the core of all sound money.

US fund manager and contrarian Peter Schiff, never a great fan of bitcoin, tweeted last week: “If you measure the size of asset bubbles based on the level of conviction buyers have in their trade, the bitcoin bubble is the biggest I’ve seen.

“Bitcoin [holders] are more confident they’re right and sure they can’t lose than were dotcom or house buyers during those bubbles.”

Is Schiff right about the bitcoin bubble? It appears he may be, but not in the way he imagines.

Bubbles in perspective

“Since bitcoin’s inception, many intelligent investors have observed that it appears to be a bubble. They are more right than they know.

“If we define a bubble asset as one that is overvalued relative to intrinsic value, then we can think of all monetary assets as bubble assets,” writes Matt Huang in a recent research paper for Paradigm.

Nobel laureate Robert Shiller observed that gold is a bubble that’s lasted thousands of years. It has some industrial uses, but it’s value is underlying value is a matter of belief.

“We can think of money as a bubble that never pops (or that hasn’t popped yet) and the value of fiat currency, gold, or bitcoin as relying on collective belief,” writes Huang.

Blockchain company Etherbridge notes that since the beginning of 2019, the bitcoin network has almost doubled its number of active addresses from 550 000 to just shy of one million by August 2020.

The users are coming and finding utility in the public payment system that is bitcoin.

The confluence of growing usage, rising miner profitability and strong savings behaviour of investors is lining up bitcoin for another bull market.

“We can think of money as a competitive market like any other. Gold dominated for centuries not by accident but by possessing important features such as being scarce and unforgeable. Today, fiat currencies [those issued by central banks] dominate.”

This article first appeared on Moneyweb and was republished with permission.

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