Comparing Bitcoin’s Price and a Classic Bubble Structure

Jacob Harper |

Predicting bitcoin’s price in the future looks to be a nearly impossible endeavor. After all, figuring in wildcards like China’s ever-shifting economic policy into the equation makes pegging the bitcoin asset market to a tee pretty damned difficult. Not to mention the fact that bitcoin exists in a weird gray area concerning what kind of asset it even is. Is it “property,” like it has been declared by the IRS? Or is it a commodity? If so, what kind of commodity? A “special virtual commodity,” as it’s called in China? How about “electronic art,” as bitcoin is classified by the Swedish government? Or is bitcoin a currency as the term “crypto-currency” implies? Or something entirely different, something we don’t even understand yet? An entirely new class of asset that fits no definition prescribed by the existing financial and governmental structures?

Perhaps that’s what bitcoin is: a “paradigm shift,” as bitcoin evangelists like Jeffrey Tucker of the Foundation for Economic Education put it as bitcoin broke $900. That’s an important argument if we truly are witnessing a revolution. It’s also an important argument if we are to compare bitcoin’s price evolution to that of a classic bubble, and look at the groupthink that takes place during the inflation of one. It’s the groupthink that tries to reinforce the idea that this asset is unlike any other in history, when really, whether it’s a commodity or a house or a tech stock or a bitcoin, it might just be another asset waiting to be bent by the will of investors' volatile emotions.

This famous illustration of a classic bubble, composed by Professor Jean-Paul Rodrigue of Hofstra University, outlines the traditional inflation and deflation pattern of a purely speculative bubble:

 

Let’s compare that to the price of bitcoin over the last year, when the price was $93 BTC: (via Coindesk):

 

 

There’s a bit of a resemblance, but it’s far from looking like an outright bubble. Let’s extend the timeline, though, and instead of just looking at bitcoin’s price over one year, let's go back two years to April 2012, when BTC was $5:

 

As Tolstoy reminded us, each unhappy family is unhappy in its own way. And every bubble pops in its own fashion. Dr. Rodrigue’s chart, then, is merely an approximation of the mass psychology behind bubble pops, and not an exact map of how bitcoin’s will – if it is a bubble at all.

Regardless, it certainly seems to be following that pattern. But it’s not the first one. Bitcoin has been through the bubble machine a few times: from April-October 2011 ($1 to $17 back to $3); March-May 2013 ($20 to $140 to $80); and now, when BTC price increased tenfold in two months before slowly dissipating.

So perhaps bitcoin is doomed to boom and bust cycles, a larger set of cyclic volatility to complement the notorious intraday volatility it routinely experiences. Or, perhaps the entirety of bitcoin’s price increase has been a giant protracted bubble, with the July 2011 and April 2013 bubbles being mere “bear traps” that serves as a prelude to the Great Bitcoin Crash, one that will eventually send bitcoin down into the penny stock range as the blow-off finishes this cryptocurrency experiment for good, or in the best case scenario relegates it to a real market price at least under $10 apiece.

The truth is most likely somewhere in between. Bitcoin has too many ideologues behind it to allow a complete burst. However, a re-inflation of bitcoin‘s price along the magnitude it has already seen looks unlikely. Or at least, one that represents a real “permanent plateau,” and not just another bubble in bitcoin’s bubble cycle.

As of 1:45 EST on April 14 bitcoin sat at $464.10 apiece, representing a nearly 20 percent rebound from last week’s sell-off.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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