Ask HN: Is Bitcoin in a bubble? | Hacker News Reader

Ask HN: Is Bitcoin in a bubble?

10 pointsJackmc104712 comments

The exponential shape of the price curve makes it appear that it is.

http://bitcoincharts.com/charts/mtgoxUSD#tgTzm1g10zm2g25zv

It looks to me like a bubble. Much of the people investing in bitcoin are doing so because of hype, or at least it looks that way. Also there is no real way to short sell on bitcoins, so the market is entirely controlled by the people who are into the hype. People who are skeptical don't have much affect over the price.

However that doesn't mean bitcoins are in a bubble, for that the true value would have to be lower than what it is. And I don't know how to even roughly estimate bitcoin's true value. That is, what the price will turn out to be in the long run, what the supply and demand will be. That depends on how big the bitcoin economy will grow, and the hype, while irrational, might actually bring enough people to it to make it work. Or it might just die as people get disappointed or move onto the next thing.

Exponential curves are to be expected for any value whose growth rate is positively correlated with its value - essentially, when you have positive feedback loops where the more you have of x, the faster x grows, which causes you to have more of x, and so on.

In this case, Bitcoin price growth made it more popular, which caused more people to start investing in Bitcoin, which further increased its price. The exponential shape of Bitcoin's price curve is entirely normal.

The real question is, does Bitcoin's current price match its "true" value? I personally believe the answer is "no", but that's like, my opinion, man.

Bitcoins don't have a "true" value by definition. The value is the belief of the Bitcoin crowd.

Value is subjective. Nothing has "true" value. Everything has value because people give it value including, since so many people use it as a counter, water. Water is definitely the closest thing we have to "true" value today but looking into the future I can definitely see technology eliminating our dependence on it.

You say that "Bitcoin['s] price growth made it more popular."

I guess my issue is what you mean by that. When people see Bitcoin's price shoot through the ceiling, I totally agree that it attracts them to speculating on the currency, further exacerbating the increase in price, causing an exponential shape.

It is not clear that its price increase would attract people to using Bitcoin as a currency and not speculation though. I consistently hear about the importance of a currency having a relatively stable value so I wonder if large, rapid price changes actually discourage using Bitcoin as an actual currency while encouraging its use for speculation (or at least not encouraging its use as a currency).

It would not make sense for anything that has independent utilitarian value to have anything but a growth rate that is correlated with that value. It would seem that exponential deviations from such a growth rate could only be due to speculative mania. If people are only or mostly buying Bitcoin because its price has increased, hoping for a further price increase, then there is only so high the price can go before collapsing.

Rereading your comment, maybe we're actually saying the same thing here.

I definitely agree with you. In a nutshell, Bitcoin's exponential growth is a result of hype. This isn't necessarily a bad thing - Facebook's initial user growth was also exponential, and that eventually stabilized. The question is, what happens when the hype behind Bitcoin dies.

I believe that, like you mentioned, it depends on Bitcoin's utilitarian value as a currency. If it turns out Bitcoin is more useful than, say, Paypal for facilitating actual transactions (as opposed to being a pure investment vehicle like it's being used now), then its price should encounter steady growth. If not, then things will get interesting.

I think Bitcoin's price is dictated less on "fundamentals" in the traditional sense.

And more on it's market irregularities (take for example the inability to withdraw USD via the SWIFT banking system without a 6 month delay from MtGOX)

It makes "price discovery" in the sense of a true currency valuation very hard to estimate, and the illiquidity makes the instrument very prone to HUGE run-ups and sell-offs. I actively trade it, and believe that a price target of over $1000 is a strong technical possibility. Though what it "resets" to after this run-up is anyone's guess.

It certainly appears so. If you take into account how governments may react to its use in the long run, it would seem rather risky at these lofty levels. But then again that may be the real value, and thus what really supports the price level, its inability to be controlled.

Yes and maybe. Yes, just like there was a bubble when it broke $200 in April 2013 and it came back down. Maybe, just like there was a bubble when it broke $200 in April 2013, came back down and continued rising beyond the $200 point.

Still not sure about that. If you have to pay tax for it it's just another currency. A currency with cool features! But I'm not sure if this is the end. I think something better will come after bitcoin.

What is it that you don't like about Bitcoin? What do you want to do with Bitcoin that you're currently not able to do? Or do you simply have concerns with its security?

Nope.

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