Listening and reading about the Bitcoin “Bubble” is fascinating!
I do not want to commit a fallacy of generalization, so I say, most of the people that view Bitcoin as a big fat bubble about to blow up anytime, and cryptocurrencies as geeks’ fad with no utility whatsoever, are either narrow-minded old men or plain narrow-minded people.
Well, they are going to be surprised. Big time surprised!
You see, anything whose value goes up beyond certain reasonable or predetermined parameters is a bubble by default. But who could state a “reasonable” level of such parameters without any point of reference?
Therefore, “reasonable” could be an extremely wide range. In the case of Bitcoin, anything from $0.1 USD to $1,000,000 USD.
So, good luck waiting for the “bubble” to burst!
However, the point I wanted to analyze a bit was based on Joseph Stiglitz’s statement that “The value of a bitcoin today is expectations of what the bitcoin is going to be tomorrow.” Duh! Who in his/her right mind would invest in something expecting its value to decrease?
He goes on to state “So it seems to me it ought to be outlawed. It doesn’t serve any socially useful function.” This is so ridiculous and out of respect, I will not comment further.
He finally stated that “Bitcoin is successful only because of its potential for circumvention, lack of oversight.” OMG! If we get these type of comments from a Nobel prize recipient, what can we expect from the common mortal?
I beg to differ, my old narrow-minded friend — yes, despite the fact that you have received a Noble prize in economics and I have not (I do have supposedly a Jewish last name and a Ph.D. though).
To begin with, you are making the same mistake Alan Greenspan made back in the late 1990s when he talked about “irrational exuberance.”
Yes, you are both looking at ‘utility’ from a purely economic Benefit/Cost perspective. You both failed to view ‘utility’ from a behavioral perspective, namely, Hedonic Tone.
After half a century screaming its lungs out Behavioral Economics was given a seat at the table of conventional economics. That is good indeed, but not good enough!
Economics is a social science, almost everyone knows that except of course conventional economists who refuse to leave their “ ceteris paribus” fantasy world, and as such it must be treated. Hence, the paramount importance of Hedonic Tone as the main driver behind most decision-making processes and bubbles such as the infamous Tulip Bubble.
When we look at ‘utility’ from the perspective of those who decide to buy Bitcoin or any other cryptocurrency, we immediately realize that it not only surpasses any B/C analysis (as opposed to Alan Greenspan’s irrational exuberance case which was indeed irrational from a B/C analysis) but it provides also a tremendously positive Hedonic Tone. But even if the positive Hedonic Tone were to disappear, the real and practical value offered by Bitcoin and many cryptocurrencies will remain and that is what will keep their price moving higher.
I can excuse Stiglitz’s position based on his narrow-mindedness and JPMorgan Chase CEO Jamie Dimon’s based on his overwhelming panic about something he can simply not comprehend, but I could not excuse any other human from not taking advantage of the wonderful opportunities before our very own eyes!
So, why do bubbles burst? The basic and simple reason, yet most sound and fundamental, is based on supply and demand. We know there will be no further supply of Bitcoins once the remaining 4 million or so are mined. That leaves us with the demand side. Will people still demand Bitcoin after its supply ends? Why not? The perceived utility (which BTY is much more powerful than real utility because of Hedonic Tone) will only get bigger/better. Keep in mind that people trust much more the power of mathematics i.e., Blockchain, than that of politicians and fiat currency.
Thus, what is it that could pop the Bitcoin “Bubble”?
What about Bitcoin’s intrinsic value you ask? Well, what about any fiat currency’s intrinsic value? I dare you to find more intrinsic value in any fiat currency than in Bitcoin!
Please do let me know if you think of anything that could pop the Bitcoin “Bubble” (firstname.lastname@example.org).
JC Wandemberg Ph.D.
About the author: Dr. Wandemberg is the Dean of Woxsen School of Arts & Design and an international consultant, professor, and analyst of economic, environmental, social, managerial, marketing, and political issues. For the past 25 + years Dr. Wandemberg has collaborated with corporations, communities, and organizations to integrate sustainability through self-transformation processes and Open Systems Design Principles, thus, catalyzing a Culture of Trust, Transparency, and Integrity.
Note: The comments presented here are the full responsibility of the author and do not necessarily represent the view of Sustainable Systems International or Woxsen School of Business.