Revisiting the Bitcoin bubble

by on April 25, 2011 · 12 comments

Here is [a chart](http://bitcoincharts.com/charts/mtgoxUSD#rg180ztgCzm1g10zm2g25) of the Bitcoin-dollar exchange rate for the past six months. The arrow notes the date [my column on the virtual currency](http://techland.time.com/2011/04/16/online-cash-bitcoin-could-challenge-governments/) was published in TIME.com. The day after that piece was published, the Bitcoin exchange rate [reached an all time high at $1.19](http://www.bitcoinnews.com/post/4703632837/daily-2011-04-17). Yesterday, just over a week later, [it was pushing $2](http://www.bitcoinnews.com/post/4897524633/daily2011-04-24).

A wiser fella than myself once said, correlation is not causation, and no doubt my article was just a contributing factor in Bitcoin’s recent run-up. It’s simply getting increasingly mainstream attention, and with that more speculators and speculation about mainstream adoption. The chart above lends a lot of credence to Tim Lee’s [bubble critique](http://timothyblee.com/2011/04/18/the-bitcoin-bubble/), so I wanted to make sure I wasn’t giving that argument short shrift.

There may well be a Bitcoin bubble, and it may even be likely. But again, I think that misses the greater point about what Bitcoin represents. Bitcoin may be tulips and the bubble may burst, but the innovation—distributed, anonymous payments—is here to stay. Napster went bust, but its innovation presaged BitTorrent, which is here to stay. Could the Bitcoin project itself go bust? Certainly, but the innovation solving the double-spending problem I’ve been talking about, will be taken up and improved by others, just as other picked up and ran with Napster’s innovation.

I want to start thinking through the practical and legal implications of that innovation. If you don’t think the innovation could ever allow for a useful store of value, then mine is a fool’s errand. I guess I’m betting on the success of a censorship resistant currency.

  • S3052

    Thanks for posting this revision.
    I am S3052, analyzing the new Bitcoin market (starting in Sep 2010) and the market technicals seem still very healthy. I my experience, when many people call for BUBBLES, it will still take a long time until finally occurs (or never).
    This is because strong declines or crashes only occur when market sentiment is too bullish (80-95%).
    My sentiment polls show that we are at only 55% bullishnes which gives a lot of room for further advances.
    And I agree with you, the technology of bitcoin is a true innovation and we will see a wave of businesses building on bitcoin very shortly.

  • Anonymous

    Unless you can buy a full range of services with them, bitcoins may only hold value insofar as they are convertible with dollars. But bitcoin to dollar services are legally vulnerable to all the things that felled e-gold and that have kept paypal from being anything truly revolutionary. If authorities manage to make it difficult enough to convert between the currencies, bitcoins may die out.

  • http://www.facebook.com/people/Joshua-Harvey/829214815 Joshua Harvey

    Even in the case of converting between currencies, Bitcoin has an advantage. Anyone can be a moneychanger, even anonymously, whereas in the case of PayPal and e-gold, there’s just the one company to go after. It’s a lot harder to go after thousands of privacy-crazy individuals than one big public company. And even if you get some of them, there’s nothing stopping new and smarter ones from cropping up again.

  • Jerry P

    I’m willing to bet by the time bitcoins represent such a threat to governments (and let’s be honest here, the only government that seems likely to be threatened by this is the US government) that they start going after currency exchange companies, bitcoins will have become so widespread that they’ll have a value as an exchanging medium independent of the dollar or any other currency. Which is its goal, really (nobody wanted it to become a speculation currency as it is being used primarily today. But even the speculation is based on the trust of its future usefulness).

    And I’m also willing to bet that a huge government bust on what is truly a harmless service will exacerbate in the public’s mind the true magnitude of the problem that is one government having that much power to meddle with the world economy and with people’s individual rights to conduct businesses with whatever currency they want, and with whomever they want (the whole paypal/visa/mastercard and wikileaks ordeal already ignited the matter in the first place).

    People don’t like to be controlled. And right now, Bitcoin is the only way you can achieve true freedom in exchanging money.

  • Pingback: Is Bitcoin a bubble? — Marginal Revolution

  • http://lyspooner.myopenid.com/ lyspooner

    I’m disappointed with Marginal Revolution’s dismissal of the currency. GMU should be all over this yet so far Russ Roberts and Jerry Brito are the only ones interested. Maybe the currency revolution just isn’t occurring far enough out on the margins to appeal to Professor Cowen. Perhaps the lead programmers should throw in a couple comments about stagnation, roadside burritos and autism to see if he warms up a little to the idea.

  • Anonymous

    They wouldn’t die out; unlike e-gold, the bitcoin system is completely distributed. So bitcoin exchanges could potentially go on completely unnoticed, even if a government says it’s illegal.

    Of course, exchanges between dollars and bitcoins could be made harder (e.g. coinpal could get shut down), but buying/selling dollars is just one of many, many uses of money ;-)

  • http://brocktice.brocktice.com/ Brock Tice

    Bitcoin is so last-year, already we have moved on to the much-better carrots. See http://weusecarrots.com .

  • blooder

    Check out this new BitCoin exchange website – https://bitcoin7.com/ – it just opened up and the rates are like two times smaller than MtGoxs’! At the moment they are even paying you when you make an exchange as part of some promotion!

  • Pingback: EFF Gone Wobbly on Bitcoin

  • http://www.facebook.com/people/Markus-Borgmann/100001671284737 Markus Borgmann

    The bitcoin price is heavily reacting to news and emotion. You can clearly see that when there are frauds and busts the bitcoin price is declining quite substantially. Check: http://bsi.sentikator.com  – They measure fear and optimism in the public opinion towards bitcoin. It lets you understand the price development and even lets you make predictions on how the price will behave in the future.

  • Pingback: TheMoneyIllusion » With apologies to Tyler Cowen . . .

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