April 10, 2013

If there’s a “Bitcoin bubble”, it doesn’t predict long term success or failure for the currency

Filed under: Economics, History, Technology — Tags: , , , , , — Nicholas @ 12:55

In Forbes, Tim Worstall explains that calling the current rise in Bitcoin value a bubble does not actually pass a judgement on whether Bitcoin will be a long term success:

And yes, I’m still of the opinion that Bitcoin is in a bubble. You know the walks like a duck, quacks like a duck idea? If it does those then it’s a duck. And the price changes that we’re seeing in Bitcoin make me and many other observers think that Bitcoin really is in a bubble. Indeed, there’s some nice work here showing that many of the Bitcoins in existence are being hoarded and that in itself is bubble behaviour.

However, do let me make one more thing clear: whether or not Bitcoin is in a bubble or not doesn’t mean that Bitcoin will succeed or not. They are entirely different questions, as different as is your wife Welsh or is your dog female? They really have no connection with each other at all.

Let us take the standard bubble example always used, the Dutch tulipmania. We could use others, the South Sea Bubble, the dot com boom, or we could even use an entirely different set of examples, say the introduction of the automobile. That last being when a new technology arrived without a speculative bubble around it.

The point of the first three, and let’s stick with tulips, is that there really was a quite obvious bubble in the prices of them. Most of the participants in the bubble (as with the other two) knew quite well that it was a bubble too. Prices were way out of line with any sort of “true value”. However, do note this very well: the tulip did indeed go on to become an important part of the Dutch economy. Indeed, it’s still there right now. Vast fields of tulips are grown there every year to supply cut flowers and bulbs for replanting that are shipped all over Europe. It’s actually become so important that other flowers, grown outside Europe, are still marketed through Holland as that’s where all the skill and infrastructure is.

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