I am a big advocate of cryptocurrencies. I love Bitcoin. But Bitcoin is in a bubble. Here’s why:
1. Entry into the Bitcoin market (fiat to BTC) is relatively easy. Exit from the Bitcoin (BTC to fiat) is relatively difficult. These facts alone facilitate purchases, while impeding liquidations. Simply put, it’s easy to buy, but it’s not easy to sell, and it doesn’t take a financial maven to recognize that’s going to elevate prices disproportionately.
2. It’s nearly impossible to short Bitcoins. The sentiment against Bitcoin is huge, and while I chuckle at some of the inexpert rantings, I do find it troubling that these naysayers have no expedient means of putting their money where their mouths are. This speaks to Shiller’s work regarding bubble mitigation:
What goes up must come down… unless there’s no easy way to make it come down.
Every day I read articles by people who know nothing about the intricacies of crypto-currencies, and have no substantive knowledge from which to attack. And yet they blather on, as if they were experts. I do cringe at these novices, but wouldn’t it be equally arrogant for me not to examine the possibility that certain factors may be causing Bitcoin to be overvalued?
I believe current valuations are minuscule compared what we will see in coming years. But in the short term, I think there’s a strong possibility we will see one or more major corrections. We have an obligation to ourselves and to our community to be realistic about that possibility.