Bitcoin’s Rise: What If It Is Not A Bubble?

April 3, 2013 4:29 pm

Some very smart folks have written about the recent rise of Bitcoin – the general consensus seems to be that this is definitely a bubble and will soon end in ‘tears’. Yes, someone out there is paying real money to buy these Bitcoins, but the financial world quotes one simple reason – ‘hey you can’t short it’ and attributes the recent rise of Bitcoin to that one factor, calls it a bubble, and tries to move on.

But what if it is not a bubble?

We have had our doubts on the Bitcoin economy – specifically, around the way the economy is shaping up – we had said this before – ‘If you think about it, the current model, where you have these ‘middlemen’ saying ‘Just pay me in Bitcoins. I will pay for what you need in USDs ‘ – is not natural. It would just get the hoarding levels up. It is one big issue with the Bitcoin Economy – and would impact its health in a bad way.’

So what is the basis for our question – “what if it is not a bubble?”

1. Many Bitcoin startups have received VC funding. The total amount invested in these startups could me more than $5 Million (Source). It’s not the scale, it’s the fact that they thought that the Bitcoin ecosystem could thrive – that is huge. Each one of those investments is a calculated bet on the future of Bitcoin.

2. How can you call something a bubble, when nobody has any idea how to value the thing? The whole dotcom bubble was a “bubble” because valuations for companies were not justifiable based on traditional valuation methods (profits and cash flows) – but those traditional methods existed. In this case, no such valuation methods exist.

3. A better term to explain what is happening with Bitcoins could be ‘Gold Rush’. But even in the Gold Rush, it is a fact that some people actually managed to make tons of money.

4. When we do not know the source of funds, such a rise in prices is actually more convincing, because we could argue that a diverse set of folks are analyzing the future of Bitcoin and are arriving at similar conclusions. (In the housing bubble, money came from the banks in the form of sub-prime loans, so it is easy to call it a bubble for example). It is possible that most folks are not buying Bitcoins right now to sell it for a profit before the music stops (in which case it would be a bubble). In this case, there are definitely other reasons why the money is coming in.

5. You cannot short Bitcoins, but you can sell them for sure. Where is the selling pressure?

(Historically, the ability to short-sell a commodity has never been a requirement for efficient price discovery)

We don’t know if this is a bubble or not – but we need to ask ourselves ‘what if it is not a bubble?’ – let us not make the mistake of missing out on the early stages of a truly revolutionary concept by dismissing the whole thing as a bubble driven only by speculation.

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