Defining a Bubble

From Charlie Bilello’s post on when a bubble becomes a bubble, specifically looking at Bitcoin in this case:

The textbook definition (from Wikipedia) is “an asset at a price range that strongly exceeds the asset’s intrinsic value. It also could be described as a situation in which asset prices appear to be based on implausible views about the future.”

Does Bitcoin’s price exceed its intrinsic value? Are the views about its future implausible?

He correctly points out that bitcoin produces no cashflow and therefore has no intrinsic value, thus coming the conclusion it’s like other anything else without intrinsic value:

If you are of the belief that Bitcoin has no intrinsic value and therefore has to be a bubble, then you must call anything without intrinsic value a bubble, including fine art, stamp collections, coin collections, wine collections, etc.

Somewhat related to George Soros’ theory of reflexivity:

As long as people believe Bitcoin has value, it will have value. If that sounds crazy, ask yourself why a Picasso or a Rembrandt has any value. At the end of the day, market prices are the result of our collective belief in a story. And right now, the story of Bitcoin appears to be good one.

A Bubble Bursting Scenario

From traditional fund manager Denny K comes a fairly reasonable article about how things could playout in a similar manner to the tech crash. 

Denny begins with a few comparisons:

In the .com bubble existing technology firms listed on the Nasdaq sometimes decided to add “.com” to their company name and saw their shares surge, sometimes 30–50%.

Well, guess what is happening now…

During the .com bubble, the major problem for analysts and investors was that most of the companies had losses and not profits, so there was hardly anything to value them on.

Fast forward to today — the same is happening again. While I want to be clear that there are important differences in that Bitcoin does have some sort of a value as a “store of value”, people making up new ideas like network value for token (not so much for Bitcoin) just makes no sense.

Then he mentions the differences that makes this even more risky, including the ridiculousness of ignoring non-released tokens, which we’ve posted about previously:

if you look at coinmarketcap.com, the “go-to” site for crypto market caps, you will notice that they only count the “Circulating Supply”

In equity markets, of course there are occasional scams and there were IPOs that turned out to be founded on not much more than a pyramid scheme. However, looking at crypto ICOs, the sheer amount of obvious scams is breathtaking.

While the .com bubble had its fair share of retail investors, the main driver were the institutions. In the crypto bubble, the field is made up almost exclusively of newcomer retail investors that probably have never held a stock in their life.

And he ends with his projections of how this may play out:

all ICOs will lose 90%+ of their value (just like during the .com bubble…) regardless of the strength of their projects. I keep bringing this up, but Amazon fell to 5.5 USD / share in 2001. It now trades at 1000 USD+. So also the good projects will fall 80–90%…

At the same time the utility token related to the ICO boom will probably crash in tandem

Cryptocurrencies such as Bitcoin will also be impacted, but I would expect an almost V-shaped recovery there as the listing of futures on the major exchanges, the formation of ETFs and more regulatory certainty will undoubtedly introduce institutional money to the space and more than 90% of that will flow into Bitcoin. Make no mistake though, Bitcoin will also suffer.

In the aftermath of this ICO carnage, I would expect the same story as with the internet firms from 2001. Really good projects will give their token holders equity-like rights and fulfill securities regulations. New ICOs will be strong companies that will have a good value proposition and again, will actually be selling something valuable and not just hot air. When this ICO 2.0 phase starts, platforms such as Ethereum will also strongly recover.

I would therefore personally not invest into any random ICOs at all nor their respective token at this late stage in the game. The likelihood you can buy all of these cheaper at some point over the next 12 months is extremely high.

Even if you completely disagree, it’s well worth a read as he brings up some great points.

CME will allow Bitcion-related products

On Chicago Mercantile Exchange’s decision to allow Bitcoin-related products, Owen Davis at Dealbreaker writes Hedge Funders: You No Longer Have Any Excuse Not To Leap Headlong Into The Bitcoin Frenzy:

According to the press release, CME is looking to launch sometime in Q4, joining CBOE in the race to start hawking bitcoin-related products. The data underlying the futures will come from Gemini Trust, the Winklevoss twins’ exchange. Bitcoin went vertical on the news.

And for good reason. Not only does this mean hedge funds can now blithely launch themselves into the crypto orgy with at least a little peace of mind, but they can do so purely on the basis of cash-settled futures that involve no underlying transfer of actual bitcoins, a process that remains rife with inefficiencies and risks like being hacked.

If bitcoin is a bubble, it’s still got a lot of inflating to do.

Has the Bitcoin bubble already burst?

JC at AllStarCharts asks whether the Bitcoin bubble has already burst and that it’s now performing similar to other assets after a crash. He even makes the case that Bitcoin is underperforming the likes of Nvidia and Amazon.

I think a lot of people are asking the wrong question. To me, it’s not whether or not Bitcoin is in a bubble? It’s whether or not the bubble in Bitcoin already popped?

What we care about when it comes to supply and demand dynamics is how the asset has performed since the bubble popped. In the case of Bitcoin, to me it’s crystal clear that a bubble popped in 2013. Again, it’s not that I’m suggesting it was “the” bubble, but an 86% crash from high to low? Yes, that is the definition of a bubble popping. The bitcoin enthusiasts argue that there were plenty of crashes prior to that, which is fine. Moving forward, from any sort of structural perspective, this 2013-2015 crash is our point of reference. Crashes prior to that led to that run up we saw into 2013.

It certainly seems reasonable to believe after reading this post.