"Perhaps the best way of understanding bitcoin is through a model of how bubbles operate. The classic model, developed by Hyman Minsky and elaborated by Charles Kindleberger, a historian who studied bubbles, has five stages: (1) displacement, (2) boom, (3) euphoria, (4) financial distress and (5) revulsion. The displacement is some technological development that can be used to justify a “new era”—railways, canals, the internet or blockchain. A boom then occurs and drags in more and more investors; at some stage, we reach euphoria, where the boom is widely known to the public and there is talk about those who made millions from the trade.
In the euphoria stage, people buy because others are buying and because they anticipate being able to sell quickly at a higher price. For a while, this trend is self-reinforcing. At some stage, however, doubts set in; some people decide to take their profits while they can. Bad news occurs; with bitcoin, it seems to be reports that authorities in South Korea (where trading has been particularly active) are going to crack down.
Once the price starts to fall, the psychology changes. People who bought early and were counting their millions suddenly see a dent in their wealth (and it is worth noting that you are not really rich unless you have got into the asset class and out again). Other people may have bought above the current price and are bitterly regretting their mistake. Bargain hunters jump in and temporarily drive the price higher but it doesn’t last.
We have not yet reached the “distress” stage but we might be near it. Worries about the security of cryptocurrencies could be the trigger for another sell-off. Investors may well reflect that bitcoin had not become a means of exchange for day-to-day transactions, has not proved to be a reliable store of value and thanks to the proliferation of cryptocurrencies, does not really benefit from a limited supply. [...]
A digital asset that has no income stream is very hard to value. That makes it hard to designate a price target on the way up, but also hard to set a floor on the way down. But by the time people realise that, we will be in the “revulsion” stage."
Now is Bitcoin a bubble? There are many arguments for "Yes", including:
- Bitcoin is NOT blockchain, which is useful and is being adopted by many financial institutions in novel ways. There are iterations to the Bitcoin idea that can evolve, and there's really zero barrier to entry i.e. a new iteration can just replace Bitcoin as the dominant cryptocurrency.
- Bitcoin is not usable as a currency, since there's a limited number of transactions per second that can be processed, and the volatility of its value means people would rather not trade Bitcoins (and people who traded with Bitcoins in the past now regret it). Indeed, seems like nobody really knows what Bitcoin should be used for nowadays.
- Bitcoin network takes way too much energy to maintain.
I'll leave you with Ronnie Chieng:
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