The price of bitcoin is going up rapidly, and a talking head comes on the TV to say that the price of bitcoin is too damn high! Is bitcoin a bubble? Suddenly, you have a vague memory that four years ago, someone saying the exact same thing.
…but then, how can bitcoin be a bubble if it keeps popping over and over again?
In this article I’m going to examine some famous historical bubbles and their context, then look at bitcoin and see if there are any similarities.
It should come as no surprise that my conclusion is that bitcoin is not a bubble, and anyone who says it is basically hasn’t done their homework. It’s a childish argument with no merit, and while there are certainly some valid critiques of bitcoin as money, being “too expensive” or being a bubble is not one of them.
Is Bitcoin A Bubble?
Famous Historical Bubbles
There have been many “bubbles” throughout history, but one interesting thing I learned while doing research for this article is that there seems to be two distinct types of bubbles.
The first one would be a bubble where some kind of nonsensical item gains value, such as with tulips or beanie babies. These are not typical investments, yet somehow there becomes a kind of mania where people prescribe excess value to them. High demand and scarcity leads to higher and higher prices, until some event lifts the fog, prices crash back to normal, and everyone moves on.
The other type of bubble is a financial bubble, where typical investments get inflated way beyond reasonable valuations. Railway mania, the Dot Com Bubble, and the 2008 financial crisis are good examples here. This is usually supplemented with mismanagement and fraud, adding fuel to the fire.
Unlike Beanie Babies, stocks, mortgages, and companies don’t just go away. Companies go out of business and people lose their jobs, but at the end of the day things go back to sensible valuations and eventually recover.
Both can be referred to as a bubble, and depending on who you ask, bitcoin may fit into either category.
The Dutch Tulip Bubble
Everyone points to tulips in Holland as the best example of a “bubble, but there’s a lot to unpack here. Most importantly, a lot of what you hear about the bubble is actually untrue. It seems that many of the stories were embellished as a way for Calvinists of the time to steer people away from the evils of consumerism.
ppl lost more money on a single 15 second dogecoin wick yesterday than the entirety of the tulip mania
Nic Carter
In short, the Tulip Bubble wasn’t as bad as it’s made out to be, and doesn’t really say much about Bitcoin – at all. In fact, Bitcoin and tulips have very little in common. The Tulip Bubble lasted only a few months, and a very limited number of people actually participated in it. Nobody was financially ruined, and speculation never returned after the bubble burst.
When you look at it that way, anyone who compares Bitcoin to tulips is either completely ignorant of history, or purposely trying to deceive you.
South Sea Bubble
The South Sea Bubble, to be fair, was not caused by pure irrational mania. This was a financial scheme coordinated by The South Sea Company and the British government of the time. The government was spending a lot of money on wars and needed a way to finance more debt. The South Sea Company offered to buy the debt, then issue shares of its stock to the public.
As with most financial schemes, they fall apart when reality hits. A private company purchasing debt from the government is a not a productive activity, so the steep rise of share prices from £140 to £1,000 in January 1720 to July of the same year was pure price speculation.
British Railway Mania
The Railway Mania of the 1840s was due to a confluence of events of the time related to the industrial revolution. There was a proliferation of new technology and an emerging middle class with new wealth. The Bubble Act (as a result of the South Sea Bubble) had been repealed in 1825, and it wasn’t much longer until a new bubble appeared.
It’s easy to see some similarities to the Dot Com Bubble of the ’90s here. It was a new technology with real use cases that people got overly excited about. Investments went off the rails, and investors stopped looking at fundamentals. As with Pets.com, which wasn’t actually shipping dog food, railways were being funded which couldn’t actually be built.
One last interesting point to note here is that although a lot of people lost their shirts in the speculative fervor, this time period resulted in a lot of real tracks being built, so it wasn’t all that bad.
Wall Street Crash of 1929
The crash of ’29 that brought on The Great Depression is a story we’re all familiar with. What’s not clear is why it happened. Of course, people point to the Roaring ’20s and excesses of that decade, but as you trace the thread back further, the origins of Black Thursday/Monday/Tuesday get more interesting.
Mainstream media will point to the end of WWI and the return of soldiers from the war, and the resulting economic boom as the primary source for the economic boom that ultimately led to the crash. What they fail to do is dig back even further, to 1913, and the creation of the Federal Reserve, and the printing of money to fund the war. In addition, credit was cheap, and retail investors were able to buy stocks with margin, which helped lead to the total liquidation of many investors of the time.
Of course, there were a lot of other things going on in the ’20s that helped contribute as well. Like the technology revolution of Britain in 1840 with the railroad, the US was having a technological revolution in the ’20s with mainstreaming of the assembly line, the booming automobile industry, and the proliferation of electricity to American households [source].
I’m not sure if there’s a lesson about bubbles in the Crash of ’29 or not. A bubble is hard to identify when you’re in it. There were plenty of people who predicted a decline of the stock market, and saw the irrational exuberance for what it was, but there were many more who brushed these warnings off.
Beanie Babies
The Beanie Baby years of the late ’90s, in hindsight, are easy to identify as a bubble. In fact, there were plenty of people during that time who correctly identified the pricing of plush animals at up to $5,000 as a train wreck in the making.
Personally, I don’t begrudge the company for producing limited runs to create demand. That was smart, not devious as some articles I read on the subject tried to imply.
The issue, in my opinion, is when people started looking at Beanie Babies as investments, instead of what they were, which was never anything more than a niche collectible. There are many collectibles in various communities around the world where you’d look at them as wonder why they hell those things cost so much money.
For example, baseball cards. Who honestly gives a shit about a piece of paper with some information printed on it when I can look up the same information online?
Personally, I think Beanie Babies never would have taken off as a collectible if it didn’t happen at the same time as the proliferation of the internet in the mid-late ’90s, including the founding of eBay. Founded in 1995, Beanie Babies was the dominant product being bought and sold on eBay by 1998. Without eBay, how would anyone have been able to source and price a plush donkey or turtle?
What’s important to note here is that this bubble was very localized, and very short, much like the Tulip Bubble.
Also, we can learn a lesson here of how bitcoin is not at all like Beanie Babies. The supply of Beanie Babies was centrally controlled and manipulated by a single person/company Ty Warner. The supply could be, and was increased to meet demand. The supply of bitcoin cannot be increased.
The Dot Com Bubble
The Dot Com Bubble had more in common with the Railway Mania in Britain than with tulips or Beanie Babies, in that these were real companies that were simply had ridiculous valuations. Investors were enamored with an emergent technology, and rather than look realistically at what these companies could deliver, the narrative at the time was that profits don’t matter and growth at all costs.
What’s interesting is that from peak to trough, the Nasdaq index crashed 77%, which is not too far off from bitcoin’s most spectacular crashes. Kind of funny how the stock market isn’t a scam even though it crashes every few years, but somehow bitcoin is different?
The aftermath of this bubble varied, with some companies like Amazon having a stellar couple of decades after bottoming out, some companies languishing but surviving, like Yahoo!, and many others disappearing off the map forever.
Again, we can compare/contrast this to bitcoin. When you invest in stocks, you are betting on a company performing well in all economic conditions. You might have bought a “good company” in 1997, then watch it go to zero during the dot com bubble due to poor management during economic conditions.
With bitcoin, you are owning an asset not centrally controlled by a single entity or subject to the economic conditions of a single sector of the economy.
2008 Financial Crisis
The full story of the 2008 financial crisis would take too long to parse out here in just a few paragraphs, so again, I’ll point you to a short video for a quick explainer.
What’s interesting here is how the seemingly narrow market of mortgage-backed securities getting overheated was able to lead to a meltdown of the entire economy. A few key institutions playing Russian roulette with their assets were able to destroy many people’s lives in the aftermath, and face very few, if any, consequences for their actions.
Also, if you ever watched The Big Short, which tells the story of Michael Burry, you’ll notice one very important thing. ALMOST NOBODY SAW THE BUBBLE COMING. It makes me think that the fact that everyone and their grandmother is calling bitcoin a bubble means exactly the opposite. Bubbles have one very interesting characteristic, in that they are able to inflate and pop, precisely because most people don’t see it coming.
Does Bitcoin Have Any Bubble Characteristics?
There are plenty of smart people who say bitcoin is a bubble, so if you look for confirmation that it’s a bubble, you’re going to find it. The trouble is, these people have been wrong over and over again.
Sure, the “bubble popped” in 2011, but then it came back. Then it popped in 2013, and 2017, and so on. There are bouts of some kind of euphoric price mania every couple of years, but the fact remains that bitcoin is being used by millions of people around the world and continues to be a useful tool for financial sovereignty.
The crazy thing about bitcoin is that it’s a free market without guard rails. There will be price speculation and market manipulation. There will be bull markets and bear markets. Since it’s an open network, anyone can join, and there are no rules other than what’s set in the code. Bitcoin is an emerging technology that has a lot of value right now and could potentially have exponentially more value in the future. In a free market, there’s bound to be some gamblers making bets as to which way this uncensorable, free market money is going to go.
You don’t have to pay attention to that though. As long as you understand what the core value is to bitcoin the asset, and Bitcoin the network, and you buy it with a low time-preference mindset, then you can safely ignore the day-to-day market fluctuations.
In the short-run, the stock market is a voting machine. Yet, in the long-run, it is a weighing machine.
Benjamin Graham
Bitcoin Has Utility, And Utility Has Value
Looking at past bubbles, in hindsight, it was easy to see that objects like tulips and Beanie Babies surpassed what a rational market would pay for them. $250 for a stuffed animal that can be easily replicated for $0.25 in a variety of emerging markets is not rational. Spending a year’s salary on a flower bulb that may rot, and at the very least produces the same kind of flower as any other bulb, doesn’t make sense.
By contrast, we can clearly point to a use case for bitcoin. While the exact value of a unit of bitcoin currency is hotly debased, I think it’s pretty easy to make the case that a non-state, non-corporate, free-floating, digital monetary unit has a non-zero value.
In short, the value of a bitcoin is not zero. If you want to argue that the current price of a bitcoin is too high, then make your case for what it should be. Regardless, the time for calling bitcoin digital tulips is over.
Pretty much the only bubble characteristic you can point to in relation to bitcoin is that the price rises fast, then crashes hard. It’s volatile. Nobody denies that. Aside from that, I don’t see any commonalities between historical bubbles and what’s going on with bitcoin.
Bitcoin Is Gonna Crash (Again)!
One of the many jokes among bitcoiners is that bitcoin is dead, and with each new subsequent crash, it becomes more dead. Bitcoin continually crashes upwards, with each bottom being higher than the previous top. A famous meme video from a few years back is a guy advising people to “not buy bitcoin” because it’s going to crash.
Though not featured in the video, most recently, bitcoin crashed from $60,000 to $30,000, then $66,000 down to $59,000. Real bummer, man!
4 Reasons I Don’t Think Bitcoin Is A Bubble
The thing about bubbles is that they don’t just pop and come back to life. There’s no such thing as “the bubble after the bubble”. Once a bubble is gone, the fog of mania is lifted, and everyone realizes it was a bubble. This is not Bitcoin’s story.
The initial “bubble” popped in 2011, then came back around even higher later in that year. Then again 2013, 2017, and 2021 ($64k to $29k to $66k). I think it’s time to stop classifying bitcoin’s price action as a bubble, and start calling it what it really is – a truly free digital market with real-time, global price discovery.
Bitcoin is a nascent technology that emerged in a time when information travels at the speed of light. Markets can react violently to news, real or otherwise. There are no circuit breakers in bitcoin markets. Markets operate in every country in the world, at all hours of the day and all days of the week. Nothing else in the world is like bitcoin, so it behaves differently to any other asset you may be familiar with.
Bitcoin is not a bubble. Bitcoin is just bitcoin.
1. People Using Bitcoin For Things Other Than Price Speculation
When you look at other bubbles in history, many times it was clear that price speculation was the core cause of the bubble. In other words, the underlying “thing” that was being valued offered very little in terms of a legitimate use case.
Beanie Babies are a great example. You can’t do much with a stuffed animal, so its price was derived from its “collectible-ness” from the beginning. The same with the Tulip Bubble. Tulips don’t really perform any function other than to be aesthetically pleasing, for which there are many potential substitutes.
Bitcoin is a very different story. You can use bitcoin the asset, and Bitcoin the network for things other than price speculation.
Remittances
Sending cheap, fast, and safe remittances is a great example. Rather than pay large fees and long travel times to use Western Union to send money overseas to family members, you can simply send them some bitcoin via your mobile phone. They can then use a local bitcoin ATM to withdraw money in their local currency, or, in some countries, spend bitcoin directly for goods and services.
Self Custody Without Counterparty Risk
Another popular way to use bitcoin is simply to be able to custody an asset with a unique risk profile. Inflation is present is all countries in the world, so holding cash in the bank is a poor way to protect the purchasing power of your money. Real estate has historically been a very popular investment, but it comes with political risk, and many times, land taxes. Plus, you often need a large down payment to even begin investing!
Money Not Subject To Boardrooms, Shopping Trends, Or Politics
Stocks, of course, require that you have the time to do your research on individual equities, or that you trust in the US economy as a whole and buy broad market index funds. The price of stocks is often subject to the whims of the Federal Reserve as they play with interest rates, or politicians as they change the rules of the game every 4 years.
Bitcoin on the other hand, is a global money that cannot be influenced by politicians and is not subject to land tax. You are not dependent on company earnings projections or Federal Reserve policies. Even if you aren’t 100% on board with bitcoin being the future of money, I think at the very least you can recognize its use-case a unique asset with unique benefits and a risk profile different from anything else out there.
2. Bitcoin Has Already Existed for 13 Years
The question I love to ask Bitcoin critics is, “What would it take to admit you were wrong?” The thing is, Bitcoin has been around for more than a decade, and the network is stronger than ever.
If you look back at past asset bubbles, they typically lasted a very short period of time, popped, and never came back. The Tulip Bubble lasted six months. The South Sea Bubble started in January 1720, peaked by July, and bottomed by December of the same year. The timeline for Beanie Babies is a little less clear, but the hype basically started around 1997-1998 and was done by ’99. The British Railway Mania lived and died in the mid-1840’s, so lasted a whole of 2-3 years max. Then they were done.
Somehow, Bitcoin keeps coming back and recovers stronger than before. Bitcoin is not the same.
Perhaps Bitcoin is most comparable to the Dot Com Bubble, although even then, it’s not a perfect comparison. The Dot Com Bubble lasted from ’96 to ’02 from start to finish, and realistically, wasn’t a typical bubble because many of the companies from back then like Amazon are still around today and have much higher valuations than they did back then.
When Bitcoin was launched in 2009, even the best cryptographers and cypherpunks were skeptical. 12 years later, Bitcoin has not only survived, but thrived. It’s grown its user base. It’s grown its market cap. There are more exchanges, more wallets, and more applications. It’s been a volatile ride from then until now, but what exactly are you looking for to make it “not a bubble”?
3. Bitcoin Infrastructure Is Getting Built
The thing about previous bubbles, is that they were all built on speculation about the future, and the future never happened. Railroads didn’t get built. Beanie Babies stopped getting manufactured. Pets.com didn’t make good on its promise to deliver dog food. This is far from true in the bitcoin space. Shit is getting built. Bitcoiners are taking action.
Bitcoin miners are producing blocks every 10 minutes. There are 10,000 nodes on the network. Users are transacting in Bitcoin base layer and 2nd layers like lightning & liquid. Zebedee is building online games on Bitcoin. Strike is helping people send remittances home. Unchained and CASA help people with multisig custody, bitcoin IRA investments, inheritance planning.
After the Chinese government kicked out all the Chinese miners, they boxed up their ASICs and send them to Kazakhstan and Texas. Hash rate recovered in a few months with no network interruption.
Individuals and companies are laying bricks, building out the infrastructure of bitcoin for themselves, their family, the future – whatever their cause may be. You don’t need permission to work on bitcoin. You just need passion.
4. Smart People Are Dedicating Their Lives to Seeing Bitcoin Succeed
Though I wasn’t around from 2009 to 2016, in hindsight, it seems that a lot of people building in early years had the mentality of, “This thing is cool, let’s see if we can make it work”. In 2021, that’s changed into “This thing actually works, and I want to make it better.” That’s a big difference in mindset.
The folks building on Bitcoin these days are changing their lives for bitcoin. They are moving cities. They are giving up job opportunities. They are changing landscapes. They are taking out loans to start businesses. They are writing and publishing for free. They are spending hours of brain power to understand this thing. They are living their lives on a bitcoin standard. They are putting themselves and their family at risk (the good kind!) with the knowledge that if bitcoin blows up, so does their lives.
This group of dedicated bitcoiners not only believes that Bitcoin will succeed, they are putting their time, money, body, and mind to work, ensuring its success.
This reminds me of Michael Saylor’s 7 layers of Bitcoin security, whereby each facet of the bitcoin network is protected by independent network dynamics. For example, the technology layer of ASICs protects the network because you can’t just flood the market with a new ASIC to 51% attack the network. Another example is the political layer protecting the network, like when unions prevented a bitcoin mining moratorium in New York in order to preserve jobs.
Bitcoin Absorbs The Smartest People From Every Sector
Similarly, when smart people dedicate their lives to bitcoin, that brainpower is now protecting the bitcoin network. A bitcoin exchange with 20 employees who depend on them is going to spend money to advocate for favorable bitcoin laws. A bitcoin mining company isn’t just going to roll over while the White House tries to ban mining in the country. Small business owners who want to get paid in bitcoin are going to push for easy-to-use apps to send and receive bitcoin over the lightning network.
Why on Earth would Square, a profitable, successful, high-profile, publicly traded company be looking into developing a home bitcoin miner and easy bitcoin multisig wallet? It doesn’t make sense that they’d just be throwing away money on r&d on a project they don’t plan to see to the end.
Bitcoin isn’t just for cypherpunks anymore. Bitcoiners belong to every walk of life, and there are some serious heavyweights orangepilling their friends, family, and colleagues. Financial advisors, bankers, engineers, coders, oil & gas engineers, farmers, bond traders, writers, and everyday people are becoming bitcoiners, and depending on bitcoin’s success.
If Bitcoin Isn’t A Bubble, What Is It Worth?
How much bitcoin is worth is a topic of constant speculation and debate. How much exactly a single bitcoin will be worth in 20 or 30 years is anyone’s guess, but let’s look at what we do know: fiat currency will continue to be debased forever.
There is no scenario possible where the cash you hold right now will have greater purchasing power in the future. Absolutely nobody believes that. Even at the lowest levels of 2% inflation targeted by The Fed, your money will still be worth 20-50% less in a just a few years.
Bitcoin is here. It works. It’s digital. It’s liquid. It has limited supply and cannot be debased by any corporation or government. The bitcoin experience will continually get easier. Older people will slowly grow accustomed to it. Younger people will grow up with it. The amount of available bitcoin cannot change. The number of people using it can, and will, increase over time.
Increased demand with a fixed supply means number go up.
Frequently Asked Questions
Why Is Bitcoin Considered A Bubble?
Bitcoin is considered a bubble by experts because it goes through periods of rapid price acceleration, then drops off a cliff. Bitcoin haters pat themselves on the back as proven right, but bitcoiners continue to build and the so-called “bubble” inflates again. Rumors of it being a bubble peak again as the next bull run ensues, and the process repeats. People have a short term memory, so can’t remember the bubbles, resolutions, and subsequent bull markets of past cycles.
Is Bitcoin The Biggest Bubble Ever?
Bitcoin hasn’t “burst” and gone to zero, so it is not the biggest ever. The biggest bubble ever was probably the US housing market bubble in 2008 due to its affect on the global economy and the amount of wealth destroyed as a percentage of overall global wealth.
Is The Bitcoin Bubble Going To Burst?
The bitcoin bubble has proven to burst over and over again, though waves of adoption and euphoric price speculation, followed by a crash and depression, then starting the process again. The price of bitcoin will continue to go up and down in the short term, but bitcoiners believe that over the long run, the price will go up as awareness encourages adoption.
Is All Of Crypto A Bubble?
From a bitcoiner perspective, we see bitcoin as a completely different asset to that of crypto. In that way, we could say that yes, all of crypto is a bubble. Crypto is made up of two camps, scams, and tech companies issuing equities LARPing as decentralized protocols with governance tokens.
Will Bitcoin Ever Disappear?
It’s unlikely that bitcoin will ever disappear completely, even if the price doesn’t go up and attract new investors over the coming decades. It’s likely that there will always be some people, somewhere in the world, who benefit from owning, transacting, and mining bitcoin. Since bitcoin is permissionless and global, the likelihood of it attracting at least a small niche group of users is very high, therefore, it will likely always retain some sort of value.
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