Editor’s note: This article was first published in September 2017, when bitcoin traded at roughly 4,000 to 5,000 dollars, before its December 2017 peak near 20,000; its price examples, bubble argument, remarks on China’s measures against cryptocurrencies and forecast of state digital currencies reflect that moment.
Although I’ve already discussed bitcoin several times, laying out only certain logical arguments that might come to pass or might never happen at all (though we have already seen some developments in China that I hope will make users aware of the risks we were warning about), one of the questions I’ve been asked most often in recent days is this:
“Carlos, we know you think bitcoin is a bubble, but what do you think the target price or the intrinsic value of bitcoin, or of any other cryptocurrency, would be?”
Well, as I’ve explained before, to begin with, you can’t calculate the intrinsic value of a currency, let alone a cryptocurrency, because they simply have no intrinsic value. They are based on supply and demand, and I made this point clear when I compared bitcoin with bottles of pee, giving reasons why, under certain circumstances, a bottle of pee could be worth more money than any cryptocurrency. It may sound like an absurd example, but…
Some people compare bitcoin and cryptocurrencies with the internet, claiming that cryptocurrencies are where the internet was in 1990. They use this argument to explain why cryptocurrencies will keep going up in price: because the internet is supposedly very valuable.
(See: What the internet looked like in 1995)
And this example serves perfectly to explain that, indeed, the internet is worth more or less the same as bitcoin: zero euros.
That’s right. The internet is worth nothing. What has value on the internet are the services and companies that have been created thanks to it. Well, in this case the internet is the blockchain (the technology that bitcoin uses), and the most valuable thing about cryptocurrencies is precisely their technology.
See also: What exactly is investing in the stock market? Debunking a few myths
The question that will tell you whether bitcoin is a bubble or not
Let’s be clear that a bubble means valuing something above its price, with people acquiring that “something” and paying more than it’s worth. In the end the market puts the price where it belongs, and some “things” are valued at zero while others lose 30, 40 or 90 percent of their valuation.
The fact that you pay 3 million euros for a house and someone else is willing to pay 4 million for it doesn’t mean the house is worth 4 million. Its value could be just 1 million.
For bitcoin, and for cryptocurrencies in general, the only meaningful way to value them would be as a means of payment or a store of value. If they aren’t used for either of these two purposes, they would exist only as a speculative product, with the misfortune that it can’t even be valued.
Will it be cheap at 5,000 euros, or expensive at 100 dollars? Nobody can answer that question, but we can answer another one.
“If you were offered bitcoins at 500 dollars per bitcoin, with a guarantee that the price would never go below that, but also that it would never rise by more than 0.25% a year, would you buy bitcoin?”
Clearly, the honest answer of 99% of bitcoin lovers would be no, because the reason they’ve invested is in the hope that it will go up further. So people aren’t acquiring bitcoins for their usefulness as a means of payment (which, admittedly, could offer some improvements over the current system). The truth is that we aren’t talking about bitcoin holders; that doesn’t exist today. We’re talking about bitcoin investors, who have put money into a product expecting its price to rise so they can make money from it.
And this behaviour is what gives rise to bubbles. A few days ago the economist Jonathan Tepper posted a chart comparing bitcoin with other bubbles, including the dot-com bubble and the housing bubble, although he could just as well have included the Dutch tulip bubble (tulip mania), because the chart would show an almost vertical line as prices rose. As you can see, that steep climb is frightening, or at least it should frighten anyone planning to buy bitcoins in the hope that the price will go to infinity and beyond.
I’ve compared Bitcoin to other bubbles. I was wrong. I apologize. pic.twitter.com/1sMFIaWgID
— Jonathan Tepper (@jtepper2) August 30, 2017
The Nobel Prize winner Robert Shiller, for his part, is even more certain that bitcoin is a bubble, fed by the false belief that governments could not stop it, and that sooner or later, like every bubble, it will burst. And the damned thing about bubbles is that nobody knows when they will pop.
With the two blows it has dealt to cryptocurrencies, China is showing that governments can exert control over these “virtual currencies”. Even so, what will probably happen in the end, as I said the last time I talked about bitcoin, is that banks will end up creating their own cryptocurrencies, as they are already doing, and that governments will do the same, creating centralised, regulated currencies backed by something more than thin air.
When that time comes, it’s not that bitcoin will disappear, but it could be made very unattractive. One thing is clear: at that point, bitcoin would end up being valued at its real value. And that real value could be 0 euros, 100 euros or 10,000 euros. Nobody knows, so, beyond mere speculation and from a financial point of view, this is a very high-risk investment, although, as you know, the higher the risk, the greater the chance of higher returns.
Featured image: MeJudice, CC BY 3.0, via Wikimedia Commons.
