Editor’s note: This article was first published in April 2013. It was written on 10 April 2013, when Bitcoin peaked at around 260 dollars; it crashed the same day, then rose far beyond the 2,500 dollars the article mentions as a hypothetical. The 600% gain since March and the bubble talk refer to early 2013.
Bitcoin is now worth 260 dollars. In just four days its value has risen by 120 dollars, while experts can’t agree on whether this could end in a bubble. It’s said that a monetary asset can’t become a bubble, although, to begin with, it would be a stretch to call Bitcoin an “asset” at all. Bitcoins are impossible to value.
People were talking about a bubble when Bitcoin was worth 35 dollars, and yet many speculators laughed at those who called it a bubble, because they’ve made a lot of money. At 35 dollars, Bitcoin was a bargain for some. The question is whether it’s still a bargain at 260 dollars. How much is a bitcoin worth?
The truth is that a bitcoin is worth exactly the same as a tulip. How much is a tulip worth? Zero dollars — but if you’re willing to pay 200 dollars for that tulip, that will be its price, though not its value. So the likelihood of Bitcoin ending up losing 99% of its value will depend on how quickly demand for bitcoins falls.
Those who bought bitcoins in March this year have made 600%. That makes Bitcoin an ideal product for speculation, because the most you can lose is 100% of the capital you invested, no more, while you could gain… even 1,000%. Just as Bitcoin is worth 260 dollars, it could be worth 2,500 dollars, and nobody could say whether it was cheap or expensive at that price because, as we said, it’s impossible to value. That is why this monetary “asset” is what’s called a perfect bubble, where the moment will come when every individual holding bitcoins loses their shirt. Until then, some speculators will probably make a great deal of money.
The price range Bitcoin can move in runs from zero to infinity. Many experts will give 1,000 reasons why Bitcoin can’t end in a bubble, but their arguments will be similar to those used to explain that housing was the most profitable investment because it always goes up and never comes down — with the difference that a home’s value can never reach zero and can easily be valued at current market prices.
Featured image: Tulpenboek Six, Public domain, via Wikimedia Commons.
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