Is Bitcoin A Bubble?

 We have all thought so, with no income and nothing backing it, and it went zooming from nearly nothing to over $19,000, only to fall back hard down to around $3000, where it more or less hung out for a couple of years with the occasional up to $6000 or so.  But recently it has moved up to over $18,000, near its previous peak, and some other cryptocurrencies have also moved up sharply, with #2 Ethereum essentially doubling in price in the last month or so.  So, is this another round of bubble speculation that will be followed by another crash?

I note that some other non-monetary assets have been moving.  After long sitting around $1200 to $1300 per ounce, with reportedly the Chinese central bank keeping it above $1000 whenever it occasionally headed down in that direction, gold this year has also moved up to near its old high.  It is now over $1800, not far from its previous high of over $1900.

Oil is not anywhere near a high, but just in the last week or so has suddenly been moving up. While hanging our around $40 per barrel for both Brent crude and West Texas crude for a long time, and even down almost to the mid-30s not too long ago, Brent as of today is at $48.70, pushing 50 for the first time in a long time, with WTI a few dollars behind.

Some are saying all this is due to a fear that the US dollar will collapse.  Maybe, although I do not know.  It is not screamingly obvious why that might happen now more than at other times.  Pro Trumpers might push this, but they were pushing the stock market would collapse if Biden won.  And, heck, the announcement of allowing transition to Biden sent the Dow over 30,000 for the first time ever, not exactly a collapse, although Trumpers say this is all due to the vaccine hopes, and all that is due to Trump.  Sure.

Anyway, back to bitcoin in particular, Tyler Cowen at Marginal Revolution (and I guess in a Bloomberg column also) has suggested there might be an improvement in fundamentals that might be consistent with a more solid upward move in bitcoin’s price, even if we see some “correction” ahead. The reason is that a number of entities out there have recently announced that they will accept payments in bitcoin, with this not likely to be reversed.  This suggests that it is not gong to collapse and disappear and also that its use as a medium of exchange may continue to spread.  This would  make it a more seriously established alternative form of quasi-money with more solidity to its longer run price.

Of coures, technically speaking all fiat currencies that are not backed by a commodity are bubbles.  They only have positive value because people think other people think they will be accepted, a sort of giant mass hallucination.  But as long as the belief holds, it works.  These are stable bubbles, not the sort that zoom up and then crash, which is what a lot of people mean when they a particular price movement is a bubble (and this may happen still with btc). This is the argument of the original overlapping generations models due to Allais and Samuelson, that fiat currencies are essentially stable bubbles that can continue because they can passed on to future generations.

Of course fiat currencies, like the USD, have their governments supporting them in a variety of ways, if not with a specific commodity, and bitcoins and other cryptocurrencies do not.  That certainly makes the cryptos a lot shakier than national fiat currencies.  But maybe they, or at least bitcoin, will now have a higher floor for its price than was the case a year ago or so.

Barkley Rosser