Bubblemongers don’t get a second chance

Tyler Cowen recently made this statement:

I used to think Bitcoin was a bubble, but I no longer hold this view.

Yes, but at the risk of being a pedant I wish he had said the following:

I used to think Bitcoin was a bubble, but we now know that this is not the case.

There is literally nothing that could happen between now and the end of time that would in any sense confirm the view that bitcoin is a bubble.  It isn’t.

But let’s say I’m wrong.  What would that imply about bubble claims?  If we gave bubblemongers a second chance, then they could do the following:

1.  Predict that Bitcoin was a bubble when the price was $10.

2.  After they were shown to be wrong they could make a new prediction that bitcoin is a bubble, this time when the price hits $100.

3.  After that prediction was shown to be wrong, make a new bubble prediction when the price hits $1000

4.  After that prediction was shown to be wrong, make a new bubble prediction when the price hits $10,000.

I hope you see the problem here.  In any 100% efficient, bubble-free market, where prices are highly volatile, eventually there will come a time when predictions that prices are too high will come true.  But that’s virtually a tautology, a market cannot be both highly volatile and efficient, unless there are occasional steep plunges in the price.  There will be some price which, in retrospect, will have been the peak price—even in an efficient market.  I don’t understand why so many people have difficulty grasping this point.

So what would tend to confirm bubble theories?  I can think of lots of evidence.  For instance, a meta-study of mutual funds that shows the superiority of funds taking advantage of bubble theories did better than funds that assumed the EMH is true (i.e. contrarian funds vs. index funds).

But again, we know for certain that bitcoin bubble theories are useless.  It’s far to late for any new information to change that fact.

Perhaps part of the problem is that people don’t spend enough time reading Richard Rorty.  They think that truth is some sort of objective reality out in the world, which we can grasp.  Perhaps (they think) the bubble theory can still be shown to be true, but for a price of $10,000, not $10.  Sorry, things don’t work that way.  In fact, there is no objective reality.  True ideas are simply useful ideas.  Since bitcoin bubble theories have already been shown to be useless, and would continue to be useless even if prices plunged by 99% tomorrow, bitcoin bubble theories can never become true.  They are already falsified for all time.  There are no second chances–so if you are going to call a bubble, don’t do so at a time when the asset price is about to rise far higher.

Here’s an analogy.  If you claim that a certain coin is unfair, biased towards heads, you don’t get to keep flipping it until you happen to get 20 heads in a row.  You get 20 coin flips.  And those first 20 flips are your test.  Sorry bubblemongers; you lost.


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72 Responses to “Bubblemongers don’t get a second chance”

  1. Gravatar of PRXCTB PRXCTB
    6. December 2017 at 10:37

    Could you define “bubble” please?

  2. Gravatar of bill bill
    6. December 2017 at 11:06

    Can we give the bubblemongers one out? If Bitcoin turns out to be a fraud and the price goes to zero?
    The funniest people are the ones who said it was a bubble at $10 or $100, then change their minds at $10,000 and who will then claim to have been right all along if the price falls to $1,500.

  3. Gravatar of Mark Mark
    6. December 2017 at 12:33

    This seems like a chronic problem: otherwise intelligent people (and some economists as well – sorry, had to make that joke) attributed acyciclical, noisy variation to bubbles. After the first sentence of your post, the coin toss analogy immediately came to mind, and I’m glad you used it. Flipping a coin three times and getting three heads, then declaring that the next one must be tails isn’t the kind of mistake you expect someone with a PhD in a quantitative field to make. But it seems like people do this with the so-called business cycle all the time.

    But you’re wrong about this being a problem of people not reading enough Rorty. This is, fundamentally, a problem of statistical mal-education (or non-education). What people don’t seem to grasp is the problem of multiple hypothesis testing; the false postitive rate for any test is probably non-zero, so if you test it enough times, sooner or later you’re going to get a positive (have economists discovered the Bonferroni correction yet?). First, you have to assert, under the null hypothesis, what the probability of the observation is (if the observation is simply ‘the price goes down the day after it goes up’ then it’s .5 as it should be equally likely to go up or down); then you see how often that happens. If it happens about 50% of the time, your null hypothesis is likely true, and you don’t have a bubble. You don’t just get to say, each time it happens, that that’s evidence of a bubble. This is plainly a problem of people not understanding statistics or probability theory, imo.

    Also, you could prove the existence of a bubble fairly simply by proving the existence of a cyclical price trend, right? You can fit your price data to two models: 1) the null, non-bubble model, a random walk (minus and long run trend); and 2) the bubble model, in which prior price increases increase the probability of future price decline. Just like the example above. If a price rise yesterday (or lat month, or whatever time frame) doesn’t correlate with a price fall today (or this month), then you probably don’t have a bubble; you just have noise. I think this is what your hypothetical mutual fund comparison is getting at.

  4. Gravatar of Mark Mark
    6. December 2017 at 12:39

    *”minus and long run trend” is supposed to be “minus any long run trend.”

    By the way, Scott, have you seen John Cochrane’s last two posts? The last one is on Bitcoin and bubbles. But the second last one, perhaps more interesting, is on “Eight heresies of monetary policy.”

  5. Gravatar of Christian List Christian List
    6. December 2017 at 14:38

    I like your subjectivity approach. At the end of the day prices are just subjective opinions about values, aren’t they? Maybe a lot of people who talk about bubbles don’t make predictions (about the behaviour of others) at all, maybe they are just saying: “I value this certain good way lower than the current market price.”

    To me Bitcoin is one big fat bubble.

    I also think that the Bitcoin bubble will burst. But it does not need to burst to be a bubble. Labeling something as a bubble and predicting a collapse of a price are two different things in my book.

  6. Gravatar of Christian List Christian List
    6. December 2017 at 14:53

    I read that the “first” corporate bonds of the ECB burst. Why did they even buy corporate bonds in the first place? What would happen if “too many” of those bonds burst? More debt? Loss of inflation control?

  7. Gravatar of Philo Philo
    6. December 2017 at 15:14

    This is a worthwhile post up to the next-to-last paragraph; there you descend into nonsense. Most philosophizing is, at some more or less deep level, nonsense, but your level is really *too* shallow! Stick with economics, which is where your (huge) competitive advantage lies. (Maybe your film criticism is OK, too–that I can’t judge.)

  8. Gravatar of Dikran Karagueuzian Dikran Karagueuzian
    6. December 2017 at 16:05

    Neither you nor the “bubblemongers” have written down a definition of “bubble”. This explains most of the disagreement.

    Putting words (or mathematics) into the mouths of both sides:

    The bubblemongers think that a stochastic process {X_n | n > 0} is a bubble if, with probability 1, it converges to zero. In fact, they would be willing to apply the word more generally, but this suffices for the purpose of this comment.

    You think that X_n is a bubble if one can define a strategy for shorting X_n which has a positive expectation and bounded risk, for some reasonable measure of risk.

    To see that the two definitions are different, consider the process X_{n+1} = either 1.8 X_n or 0.5 X_n, with the choice determined by independent coin flips at each stage. This is a bubble in their sense but not yours.

    Obviously your definition is a whole lot closer to the right one, but both sides should really write definitions down. Or at least axioms that a reasonable definition should satisfy.

    Personally

  9. Gravatar of ssumner ssumner
    6. December 2017 at 17:36

    Mark, I did a blog post on the first heresy he mentioned, and plan to do another post on the other seven.

    PRX and Dikran, I’d rather the bubblemongers write down a USEFUL definition, and then I’ll respond to that.

  10. Gravatar of Benjamin Cole Benjamin Cole
    6. December 2017 at 18:38

    I think Scott Sumner wins this argument,

    I still contend that when gold, Franklin Mint collectibles, Shaker furniture, or Andy Warhol prints get “hot,” then maybe what can be called a “bubble” happens. There is no fundamental value to the aforementioned. But who can predict when the bubble will burst? The value is based on “consensual delusion.”

    Bitcoin seems sui generis at this point. It has some sort of value in financial secrecy, and scarcity.

    The fact that Tyler Cowen now says bitcoin is not a bubble, probably means we are near the top of bitcoin value. When the mainstream comes to accept bitcoin, I predict a top has been hit.

    There was a time in the American past when if something was noted on several major magazine covers, you knew the top had been hit, or bottom. The famous “Death of Equities” BusinessWeeek cover in 1979, of example.

  11. Gravatar of Mark Mark
    6. December 2017 at 19:32

    I couldn’t agree more with Philo.

  12. Gravatar of Rajat Rajat
    6. December 2017 at 19:37

    Benjamin, I disagree – Tyler Cowen is hardly a taxi driver!

    I say we are near the top of Bitcoin value when Scott Sumner says it’s a bubble 😉

  13. Gravatar of Major.Freedom Major.Freedom
    6. December 2017 at 19:53

    It isn’t bitcoins that are in a bubble, it is fiat.

  14. Gravatar of Major.Freedom Major.Freedom
    6. December 2017 at 19:53

    California is the new redneck south:

    http://www.sacbee.com/news/state/california/article188153344.html

  15. Gravatar of Major.Freedom Major.Freedom
    6. December 2017 at 19:56

    New bill being proposed by California lawmakers, they’re calling it the “Just change the definition of reading then, oh and 2+2=5” bill.

  16. Gravatar of Matthew Waters Matthew Waters
    6. December 2017 at 20:06

    The way it’s framed, is there any falsifying Scott’s “bubbles don’t exist” arguments? It veers all the time between “it’s tough to make money in the markets” to “markets are always correct.” Or as I heard the EMH explained in school: “Prices reflect all publicly available information.”

    The textbook definition of EMH would have to be considered heavily flawed, just by the 1987 crash. No publicly available information could have come close to changing valuations by 20%. Over a longer time period, what about housing prices in 2005 and 2007? NGDP expectations did NOT change from 2005-07. It’s very unreasonable to think the price level change purely reflected the market absorbing new information.

    Same is true of bitcoin. If the market says the correct value of bitcoin is now $12k, then was the market also correct at $100? At $1,000? What about last week, at $9k? What headlines explain a 33% increase in a week?

    This post frames “bubble theory” as calling the peak in an overpriced market. “Bubble theory” then is market timing and I agree it is probably impossible. But what about calling a market as unlikely to perform well against alternative investments over 5+ years? I think many markets have been in such a bubble.

    It may be tough or impossible to bet against the bubble. But you can also *refrain* from buying it. Hard-EMH, like this post has, suggests you can be indifferent between $10,000 of bitcoin and $10,000 of T-bills, holding them both for 10 years. How many people would honestly and truly want to take that offer?

  17. Gravatar of Mark Mark
    6. December 2017 at 20:32

    Matthew Waters:

    “If the market says the correct value of bitcoin is now $12k, then was the market also correct at $100? At $1,000? What about last week, at $9k? What headlines explain a 33% increase in a week?”
    Why not? As you note, it’s the reflection of all publicly available information. Well, if the available information changes, especially if there’s fairly little information available, then prices will fluctuate.

    The absence of a bubble does not necessitate stable prices.

  18. Gravatar of Alec Fahrin Alec Fahrin
    6. December 2017 at 20:37

    Matthew,

    I want to start out by saying that your post includes multiple false dichotomies, false equalities, and misrepresentations. For example, your implication that $10,000 in Bitcoin is the same value as $10,000 in T-bills.

    As for Bubble Theory vs. Sumner “Bubble” Theory, I’d argue it’s difficult to know who is always correct. Yet, on the whole, Sumner’s “Bubble” Theory appears to be right more often than not. Just like the EMH is right more often than not.

    The markets can misjudge value, rarely, but they do. The problem with Bubble Theory and non-EMH is that more often than not, they are wrong about “misjudged value”.

    In a world of generalities where nothing is absolute, except death and taxes (and now maybe not even that for some rich people), more often correct is better than less often correct.

  19. Gravatar of Matthew Waters Matthew Waters
    6. December 2017 at 22:36

    Alec,

    For one thing, EMH gets into contortions such as this:

    “For example, your implication that $10,000 in Bitcoin is the same value as $10,000 in T-bills.”

    I’ve read this sentence many times and cannot make heads or tails of it. If you’re saying people are buying bitcoin at $10k for its actual use as currency, then I strongly disagree. The real economic transactions done purely in bitcoin have not picked up, as far as I know.

    The simple truth is people are speculating on bitcoin with little foreseeable real value. The only conceivable bona fide, non-speculative use of bitcoin is transactions for illegal goods (such as ransomware, drugs, etc.). Under any conceivable scenario, it has far worse transaction properties than mainstream currencies.

    Like with tech stocks, many people will make a lot of money, but it can’t be sustained. A lot will be sunk into wasteful spending with electricity for mining. As a whole, the market for bitcoin will lose money.

    See the statistics given by David Swensen about mutual funds with tech stocks in the 90’s. This lecture is also required viewing generally. He says things much better than I could.

    https://www.youtube.com/watch?v=AtSlRK0SZoM

    The way EMH is framed makes it insurmountable. You say markets misjudge value “rarely.” I would say misjudged value happens in major markets once or more a decade. With the stock market, this is what Buffett did *at the time* over 40 years:

    1. In 1972, dissolved his partnership at peak of market.
    2. Went back into stocks after 1974 recession.
    3. Sold all but his core holdings in summer of 1987, before the crash.
    4. Stayed out of tech stocks in 1999 and wrote article about how market was overvalued.
    5. Wrote an article in Oct. 2008 saying to buy stocks.

    For housing, at least Charlie Munger did warn about a real estate bubble in 2005.

    http://money.cnn.com/2005/05/01/news/fortune500/buffett_talks/

    Furthermore, Buffett wrote against gold when it peaked in 2012.

    OTOH, Buffett has singed the praises of index funds. He won his bet, easily, against expensive portfolios of hedge funds versus index funds. The naive view of the EMH, that most active management does not overcome fees, is correct.

    But then EMH is stretched to significantly underestimate how much markets can get their prices wrong. It can be really tough to time, but investors should at least entertain the possibility of a large mispricing in some cases. Tech stocks in 1999, housing in 2005, and today, bitcoin.

  20. Gravatar of Benjamin Cole Benjamin Cole
    7. December 2017 at 02:16

    Rajat–

    Neither were the magazines of yesteryear written by taxi drivers. But if Time, Newsweek and US News & World Report had something on their cover in the same week…time to get out….

    Tyler Cowen is a good meter on mainstream intellectual postures and thinking, maybe a tad right-wingish. He may be the advance guard, but then maybe not. The internet has been an equalizer.

  21. Gravatar of Benjamin Cole Benjamin Cole
    7. December 2017 at 02:55

    OT but in the ball park:

    “Unit labor costs decreased 0.7 percent over the last four quarters.” Q3 BLS report, out yesterday and roundly ignored.

    This is what you get for courting labor shortages.

  22. Gravatar of Christian List Christian List
    7. December 2017 at 03:34

    Bubbles are like porn: Hard to define but you know it when you see it.

    @Benjamin Cole

    The fact that Tyler Cowen now says bitcoin is not a bubble, probably means we are near the top of bitcoin value.

    Ha, ha. I thought exactly the same thing. It wasn’t a bubble before but now every idiot I know (in my private life) is talking about Bitcoin with really big dollar signs in their eyes. People who usually never invest spent their very last penny on Bitcoin, they even run into debts to get more and more of the praised substance. That’s usually a good indicator for a bubble.

  23. Gravatar of Effem Effem
    7. December 2017 at 05:30

    If BTC isn’t a bubble then why is there such incredible demand for alternatives to fiat currencies? This is way beyond “secrecy” at this point. What wisdom is the market trying to convey?

  24. Gravatar of ssumner ssumner
    7. December 2017 at 08:01

    Matthew, You said:

    “The way it’s framed, is there any falsifying Scott’s “bubbles don’t exist” arguments?”

    Did you read the post? I provided a method.

    The burden of proof is on bubblemongers to show their theory is useful. So far they have not done so.

    Effem, You said:

    “What wisdom is the market trying to convey?”

    That’s the whole point of the wisdom of crowds, isn’t it? Or am I missing something?

  25. Gravatar of Effem Effem
    7. December 2017 at 08:25

    Seems like most BTC adherents believe that fiat money is in the process of being wildly mismanaged and the world will need substitutes fairly soon. Do you agree with such wisdom?

  26. Gravatar of Brian Donohue Brian Donohue
    7. December 2017 at 09:28

    Amazon is a perfect example of the dotcom bubble.

    On 3/3/1998, the stock closed at $5.98 per share. While this represented a quadrupling of stock value in less than one year, it wasn’t a bubble, just a fair price.

    On 12/10/1999, at the height of the dotcom frenzy, the price hit $106.69, a 17-fold increase over the 1998 price and a 50-fold increase over the IPO price.

    This was a bubble. A really smart guy told me. He said it was impossible for Amazon to ever generate the kind of earnings needed to justify such a high price.

    And he was right. The bubble popped. By 9/28/2001, the price had tumbled back to $5.97 per share, precisely where it had been 3.5 years earlier, before the mania.

    There you go. A nice clean bubble story from beginning to end.

    P.S. Amazon closed yesterday at $1,152.35 per share. The idiot who bought at the 12/10/1999 bubble price has earned a measly 14.1% annualized return since then.

    Obviously, Amazon today is the mother of all bubbles, amirite?

    P.P.S. Seeing bubbles is almost always a malfunctioning of the brain’s pattern-recognition system, like conspiracies. This is confounded by the fact that there are real conspiracies and bubbles, they are just much less common than imagined.

  27. Gravatar of msgkings msgkings
    7. December 2017 at 10:17

    So much of this debate, if it even rises to the level of one, is about the meaning of a word. So no one really wins. By Sumner’s definition, he’s right. By Matthew Waters’ definition, he is.

  28. Gravatar of KevinA KevinA
    7. December 2017 at 10:24

    @Matthew Waters

    ” The only conceivable bona fide, non-speculative use of bitcoin is transactions for illegal goods (such as ransomware, drugs, etc.).”

    I disagree, I believe bitcoins most prevalent use is a way for hard-money types to store purchasing power.

    “A lot will be sunk into wasteful spending with electricity for mining.”

    If a miners were really using so much energy, then they would weigh the benefits of mining against the cost of the energy. The would rationally conclude that the little bits they collect would not be worth the energy they were paying for, and stop.

    As a result, I doubt bitcoin energy demands are really that onerous, mining still seems to be a profitable endeavor.

    “OTOH, Buffett has singed the praises of index funds. He won his bet, easily, against expensive portfolios of hedge funds versus index funds. ”
    For every buffett, there are probably 10,000 non buffets that fail at beating the market. You could rationally argue that buffets success was all due to luck, as it is very probable someone will be able to consistently beat the market by pure chance.

    Hey guys, I have a new question for you: Why does bitcoin have so many haters?

    I don’t believe in the gold standard, but I am indifferent to them: I don’t feel that its necessary to pile on vitriol like others seem to enjoy doing with bitcoin.

    Is it status signaling? Do people hate hard money libertarians? I wonder what it is…

  29. Gravatar of PRXCTB PRXCTB
    7. December 2017 at 10:54

    It’s a bit of a copout to write about something then refuse to define it. I’ll offer my thoughts but really I’d like to understand what you meant by “bubble” when you wrote the post so I can better understand your thinking.

    I would indulge you with a definition but I don’t think I agree with either the bubblemongers or you. It can’t be said whether or not bitcoin or any asset is a bubble without the benefit of hindsight.

    Bubble: a significant price run-up and crash where asset prices diverge from “fundamental value” and are driven by speculative players, often employing leverage.

    What can be said is:
    -bitcoin has some “fundamental value,” or reason to believe the price should be greater than zero in the long-run (e.g. bitcoin replaces the dollar in the global financial system, or a few retail investor goldbugs becoming coinbugs instead)
    -this fundamental value is dependent on the future
    -the future is unknowable and has a wide range of potential outcomes, so the fundamental value is unknowable and has a wide range of potential outcomes
    -it’s also very hard to guess at with accuracy or precision, and there is no generally-agreed upon model for doing so, so estimates will vary widely
    -the price has been highly volatile, driven by what appear to be speculative players entering the market (though this assumption could turn out to be bad)

    So, given all of this, one could imagine bitcoin’s price being an order of magnitude higher or lower in a year (or the same).

    That certainly looks like it might be a bubble. Not “the top,” which is what I think you mean when you say “bubble.” The top is impossible to reliably predict. Very smart people fail, and a few get lucky on occasion. But it looks like a run-up driven by speculation that could collapse, so it looks like it could be a bubble.

    Maybe it won’t ever crash, maybe it won’t for a while. No one can say for sure. So, in my model of the world, asserting it is or is not a bubble is a waste of time and probably just reflects your view on the fundamental value. Saying it is not or could not possibly be a bubble, IMO, is overconfident given the evidence.

    Still curious to better understand your post though.

  30. Gravatar of John Hall John Hall
    7. December 2017 at 11:05

    Can we have a retrospective on this post in 1 year?

    Out on a limb:
    I wonder if perhaps you could think of this more as a corner than a bubble.

    As a currency, bitcoin has relatively fixed supply. This means that increasing money demand is leading to its appreciation. However, this also means that prices in bitcoin are falling. It’s a deflationary spiral. There is no incentive to spending any bitcoin when the price is increasing like this. It’s all hoarding. Everyone who holds bitcoin has very little incentive to sell it. According to this link [1], about 1600 addresses control 40% of bitcoin. If they aren’t selling (perhaps not because of any sort of coordination) and others who also hold large amounts aren’t selling, then there’s only one way for the price to go.

    [1] https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html

  31. Gravatar of David Pinto David Pinto
    7. December 2017 at 11:05

    I suspect you need a lot more than 20 flips to see if a coin is fair.

  32. Gravatar of Matthew Waters Matthew Waters
    7. December 2017 at 11:06

    Scott’s

    “Bubble Theory” just says: don’t buy Bitcoin. Or other markets which have little fundamental basis for their pricing. By contrast, a purist EMH approach is indifferent among all assets, because they all have efficient prices.

    For economic theories, many theories have come up. Fama factor model doesn’t really jive with efficient markets for example. There is simply so much evidence of consistent mispricing (such as value vs growth stocks).

    EMH just seems to have a really low bar of evidence, while any possible exceptions to it have an impossible level of evidence. I gave five times that Buffett correctly entered and exited the stock market. While Buffett is an extremely talented stock analyst, his analysis in those cases is not *that* difficult to understand.

  33. Gravatar of Matthew Waters Matthew Waters
    7. December 2017 at 11:18

    On a technical level, there are many reasons why Bitcoin will not replace currencies backed by governments. Steam stopped taking Bitcoin because of its price volatility.

    Hard money types want currency to be fixed in value forever. In practice, predictable inflation is more important than 0% inflation. Predictable rates of 2% or 4% keeps interest rates steady. It also keeps paper currency buying power.

    Bitcoin has nothing like a 2% inflation stability. Who would put a contract on a house in Bitcoin? The contract could specify a much more stable currency (i.e. dollar) and do settlement in Bitcoin. But then the transaction costs are higher. There is no reason to do that.

    So fundamental value as a currency is only for illegal transactions. You can argue that hard money types will keep giving it psychological value. But they can be pretty fleeting, especially the newer entrants. Gold declined in price a lot after 2012, with a lot of the same arguments given for gold.

  34. Gravatar of PRXCTB PRXCTB
    7. December 2017 at 12:06

    @mattt

    A fleeting hard-money type just sounds like a speculator by a different name. The kind of hard-money types that create fundamental value in an asset definitionally stick around. There will be of course be flows in and out around these persistent buyers, creating volatility.

    Gold has this dynamic; despite pretty high realized volatility vs. the dollar since 1971, it’s also been a pretty stable store of value for >100 years. Bitcoin could go that way. I think it’s more likely that your use case (illegal activities) is where it ends up, but other outcomes aren’t unimaginable

  35. Gravatar of KevinA KevinA
    7. December 2017 at 12:09

    @matthew waters

    I king you: you now have the crown of non-sequiters.

    Bitcoin doesn’t have 2% inflation, so, therefore, bitcoin is only for illegal transactions. Lol, non-sequiter

  36. Gravatar of Matthew Waters Matthew Waters
    7. December 2017 at 12:58

    @PRX

    Well, gold wasn’t entirely stable for >100 years. Scott wrote a book about how gold’s real value (and thus the dollar’s) caused the Great Depression. Since gold had limited supply increases like bitcoin, its value varied with demand. Gold’s value increased substantially when the French central bank purchased a lot of gold in 1929.

    Fiat currency only has ultimate backing of taxing ability of sponsoring government. But when fiat currency has a stable inflation targeting regime, the inflation rate is more stable, not less, compared with a gold standard.

  37. Gravatar of Matthew Waters Matthew Waters
    7. December 2017 at 13:01

    @KevinA

    How many bona fide, legal transactions have happened with bitcoin, where bitcoin purchased real goods and services? Steam stopped accepting bitcoin because of the volatility.

    https://steamcommunity.com/games/593110/announcements/detail/1464096684955433613

  38. Gravatar of Britonomist Britonomist
    7. December 2017 at 13:22

    I think you’re too hung up specifically on the term “bubble”, what matters if whether bitcoin’s price makes any rational sense whatsoever, and isn’t just a massive greater fool scenario. Can you explain to me what fundamentals have driven bitcoin to increase in price 1000x in a year (nothing about the technology has changed)? Can you give me the fundamentals that caused bitcoin to rise by 20% *yesterday*?

  39. Gravatar of KevinA KevinA
    7. December 2017 at 13:49

    @Matthhew waters

    “How many bona fide, legal transactions have happened with bitcoin, where bitcoin purchased real goods and services?”

    You are begging the question. Stop reframing the question, please. Why go on money illusion to simply troll?

  40. Gravatar of KevinA KevinA
    7. December 2017 at 14:09

    @PRXCTB

    “I would indulge you with a definition but I don’t think I agree with either the bubblemongers or you.”

    That’s the problem with bubble believers, like Robert shiller: they proclaim that bubbles are everywhere, but fail to give us a methodology for determining the difference between a price increase based on fundamentals, and a bubble.

  41. Gravatar of Britonomist Britonomist
    7. December 2017 at 14:24

    The important question is this, are people buying an asset because they are aware of some new information regarding some underlying fundamentals that the asset reflects (good), OR are they simply buying the asset without knowing any new fundamentals, but purely because they believe someone else will buy it off for an even higher price (BAD)?

  42. Gravatar of PRXTCB PRXTCB
    7. December 2017 at 14:28

    @matt
    Note I am not arguing for a gold standard, nor for bitcoin replacing fiat currency. I was just responding to your comment which seemed to assert gold is not a good long-term store of value. The gold standard and competitive devaluation of the early 1930s certainly contributed to the global depression. The case for whether or not they caused it is less clear.

    My point is more along the lines of.. There are very few securities that would have preserved your wealth over 100 years as well as gold. us/uk govt bonds and the us/uk stock markets were good. pretty much anywhere else and you get wiped out at least once. There’s reason to believe it will have a long-run value greater than zero, which has been proven by the test of time and the 2011-2013 action of the gold market is too narrow a lens to look to refute that.

    @kevina
    I don’t proclaim they are everywhere. I do proclaim they can only be defined in hindsight and identifying them is guesswork until you have that, and that identifying the top is impossible. It might not be the most useful definition however, which is why I asked…

  43. Gravatar of KevinA KevinA
    7. December 2017 at 14:30

    @Britonomist

    Rational bubble

  44. Gravatar of Matthew Waters Matthew Waters
    7. December 2017 at 16:11

    @PRX

    Fair points. I would only say that “securities” over the last 100+ years also pay interest, principal and dividends. A bond from Prussia in the 1800’s may not have preserved value like, but it may have paid a better return than gold if it was later reinvested in something else like US/UK securities.

    For what it’s worth, West Germany did resume payment on some obligation of Germany from before World War II. It even paid off the Nazi debt in the 20 years after 1990. I believe the same is true of France.

    https://www.theatlantic.com/international/archive/2014/11/still-paying-world-war-i-debt-100-years-later/382293/

    In any case, I understand the case for gold always retaining some value. It was used consistently for transactions from Roman times up through end of Bretton Woods. Even I will admit it has some long-term value above zero.

    Now, as I understand the fundamental case for bitcoin, a bitcoin private key will have psychological long-term value like gold. Am I understanding the bullish case for bitcoin correctly? KevinA and others have basically admitted that bitcoin has not had bona fide, legal economic transactions. There is no sign it will be used for such transactions.

    So despite the name “cryptocurrency,” it will not be a Medium of Exchange or Unit of Account. It will only be a Store of Value, which will retain value like gold has. I find that hard to believe. For one thing, governments are still the biggest owners of gold. In 10 years, will we store private keys for bitcoins in Fort Knox? It’s absurd.

  45. Gravatar of Matthew Waters Matthew Waters
    7. December 2017 at 16:36

    “That’s the problem with bubble believers, like Robert shiller: they proclaim that bubbles are everywhere, but fail to give us a methodology for determining the difference between a price increase based on fundamentals, and a bubble.”

    Actually, Schiller has provided some methodologies to give rough hints of overvalued or undervalued markets. He has Schiller 10-year P/E for stocks and Case-Schiller price-to-rent ratios for housing.

    A naive version of earnings yield (E/P) vs. 10-year yields has been really predictive of stock returns. Since 1980, E/P went two percentage points under 10-year yield two times: before 1987 crash and in 1999. In 2009-11, E/P was 6 percentage points above 10-year yields.

    http://blogs.reuters.com/felix-salmon/files/2011/08/US_SP10YT0811_SC.jpg

    I say “overvalued or undervalued” because the word “bubble” seems to get you guys really riled up. The word “bubble” perhaps has the connotation that investors are complete idiots, with a pure Keynesian beauty contest. That’s not usually true. I do think decently intelligent investors put too much stock in prior returns, Fear of Missing Out, etc. Vague stories, such as dot-com in 1999 or crypto today, carry too much weight without enough true inspection of fundamentals.

  46. Gravatar of B Cole B Cole
    7. December 2017 at 16:59

    Interesting question: could bitcoin have a gained acceptance pre-Internet?

  47. Gravatar of msgkings msgkings
    7. December 2017 at 18:22

    @B Cole: not sure if you’re serious. Bitcoin could not have existed pre-internet. Probably couldn’t have existed until about 10 years ago. Maybe you just trolled me good.

  48. Gravatar of KevinA KevinA
    7. December 2017 at 19:13

    @Matthew Waters

    “Actually, Schiller has provided some methodologies to give rough hints of overvalued or undervalued markets. He has Schiller 10-year P/E for stocks and Case-Schiller price-to-rent ratios for housing.”

    Obviously, if Schiller had been successful, we wouldn’t even be having this conversation.

    Waters, you must be a troll. No one can simultaneously be so knowledgeable and so dumb at the same time.

  49. Gravatar of James Alexander James Alexander
    7. December 2017 at 22:51

    We approximate objective reality with tests for what works.

  50. Gravatar of Geoff Orwell Geoff Orwell
    8. December 2017 at 06:25

    You’ve got this one wrong. The conditions that have brought about the rise in value of bitcoin are not unique: i) scarcity ii) belief in “some new idea”, in this case that crypto currencies are the future and USD is not iii) speculative money, often leveraged driven by greed or FOMO.

    If you adjust for risk ie volatility, you’d still have been better off in the S&P this year. So for people to declare some sort of investment victory is absurd, you may as well have gotten lucky on a penny stock or had a hot run on the roulette table (I could find you plenty of penny stocks that have risen 000’s of percent with less volatility then bitcoin).

    We know the USG cannot allow bitcoin to rival the USD as it would crush the fed’s ability to act as a lender of last resort and to control macro outcomes, it’s only 2 purposes.

    So with that in mind, it’s perfectly reasonable to assert that Bitcoin is a bubble: utterly unsustainable (fundamentally worthless), with billions of speculative $ flooding in. The higher the market cap rises, the more of a risk it is to financial stability and the more incentive there is for Uncle Sam to shut it down, which he inevitably will. In the meantime, gamblers, criminals and bored Chinese millionaires will continue to do their thing, and the poor suckers who get sold the dream and put all their savings into it get shafted.

  51. Gravatar of Geoff Orwell Geoff Orwell
    8. December 2017 at 06:29

    I agree on your argument re objective truth, and I wouldn’t say Bitcoin wont go to 50,000, but purely from an investment standpoint, there is no utility, it is just a speculative frenzy. I fear for the poor families, children and naive investors getting sold this stuff who will one day lose everything.

  52. Gravatar of SG SG
    8. December 2017 at 07:25

    Maybe we can broker an agreement where Tyler admits that we know Bitcoin isn’t a bubble, and Scott admits that James Harden is a vastly better basketball player than Russell Westbrook.

  53. Gravatar of Christian List Christian List
    8. December 2017 at 11:41

    I think a lot of EMH guys and bubble guys are much closer together than they think. It’s mostly just quibbles, and arrogance, and picking the worst possible definition of the other side they can get there hands on.

    @Brian Donohue
    Bubble guys pick the loser on hindsight. It looks a bit like you are picking the winner on hindsight. How many (real) people did really invest relevant sumps of their money into Amazon in 1998 when it was $5.98 a share? (According to the price: Not too many). And then how long did they really hold it? And how many people (maybe even the same) did really lose A LOT of money during the dotcom crash and never recovered from it?

    @Scott
    A lot of people don’t get parts of your coin flip analogy (me included). When I see Bitcoin I see a really big winner. It’s really like getting 10 (or even more) heads in a row.

    Now EMH guys seem to be saying: „Nothing to see here, perfectly normal, random walk, EMH, supply and demand, and also: fundamentals!“

    I even agree with that part of the story; except for the fundamentals, I can’t really see them, but nevertheless it could be a true story. But then also other parts of my life experience kick in, and that’s why I have to agree with the bubble guys as well:

    The Bitcoin story is a typical “too good to be true”-story. It could be true but my life experience tells me that at least 98 of 100 of these stories have a really huge catch. So I’m still waiting for the catch. And throwing a coin 10 or 20 times won’t change my mind. And when I really throw it 20 times and I get heads 20 times in a row (like with Bitcoin), I will think: “Great I’m the luckiest guy in the world”. But then my curiosity kicks in and I throw it another 20 times. And if it’s 20 times heads again, I might think: Maybe I’m not the luckiest guy in the world. Maybe there’s another explanation? Maybe something about the coin is abnormal? Abnormal in the sense of a really great , really rare invention — or abnormal in the sense of a very classic, very common fraud scheme.

    Let’s just hope it’s not a fraud (on the other hand I don’t really care because I’m not invested; but a fraud might hurt capitalism and neoliberalism again, and we can’t really use that right now).

  54. Gravatar of Matthew Waters Matthew Waters
    8. December 2017 at 11:55

    KevinA,

    I may be wrong, but I believe everything I write (at least until I’m convinced otherwise).

  55. Gravatar of Christian List Christian List
    8. December 2017 at 11:55

    Your coin analogy reminds me of a guy in 1942 at the peak of Nazism saying: “Nearly 10 times in a row now, basically whole Europe under control, nothing to see here, greatest field commander of all time, the test is over, let’s call it quits and prepare for the Thousand-Year Reich.“

    Fortunately it was just another big fat bubble that burst just a few moments later.

  56. Gravatar of Matthew Waters Matthew Waters
    8. December 2017 at 11:58

    Christian,

    Yeah, making some “random walk” EMH about bitcoin’s price makes me particularly incredulous. It went to $1k to $5k to $10k to $18k(?!), all from the market dispassionately finding out new information.

    There are a lot of really bad anti-EMH arguments, such as by finance talking heads justifying their own fees. But does a simple random walk for bitcoin really match common sense? Use the EMH as a general parable that it’s tough to beat the market. But geez, also know its limits.

  57. Gravatar of Christian List Christian List
    8. December 2017 at 12:02

    @Matthew Waters
    Your comments are fine. Keep it up and don’t get drawn down by a guy who seems to be labeling others as trolls just because they don’t agree with him.

  58. Gravatar of KevinA KevinA
    8. December 2017 at 12:09

    @Christian List

    Dude, I must be taking crazy pills. Matthew waters used the argument that bitcoin was a huge energy drain on our grid lol. He sort of selectively picks and chooses which arguments to respond too

  59. Gravatar of Christian List Christian List
    8. December 2017 at 12:17

    @Matthew Waters


    It went to $1k to $5k to $10k to $18k(?!), all from the market dispassionately finding out new information.

    That’s one point where I get skeptical as well. In the end it’s just a really huge bet. A bet that Bitcoin will become really really big. But of course this bet can completely blow. And I assume that’s what bubble guys call a bubble: A bet that blew.

    Of course it’s hindsight, but all history is about hindsight, I don’t see why it’s suddenly so bad, when they use hindsight as well. Even Scott is using hindsight, when he talks about NGDP. He wants a NGDP future market I guess. But so far it doesn’t exist. Where’s the Bitcoin future market? Who is selling Bitcoins short so far? Let’s see what happens then.

    Another funny side story: Scott’s hole (in my opinion correct) theory about market monetarism and NGDP targeting seems to be based on the idea that humans are not completely rational, that they have a fixation on nominals, and that they don’t accept pay cuts when they are most needed. So it seems to be both worlds: EMH and “behavioral” stuff. –> and it might have been actually Scott, who combined them.

  60. Gravatar of Christian List Christian List
    8. December 2017 at 12:31

    KevinA,

    I didn’t follow your whole discussion.


    He sort of selectively picks and chooses which arguments to respond too

    I guess everybody does that now and then. It doesn’t automatically mean that the other person is a troll or worse. You didn’t answer his question about fundamentals as well, if I remember correctly. This just happens. We can not answer every question in this huge thread. Your comment about the energy point is correct ofc. They will just stop mining depending on the costs. That’s the rational part. (Even though I assume their calculations involves future prices too, so that’s the betting part).

    @Matthew Waters

    “Bubble Theory” just says: don’t buy Bitcoin. 

    I think this comment of yours is one of the best in this thread.

    And funnily enough maybe EMH says this as well: Don’t buy Bitcoin.

    Buy stuff that you really want and need and use.

  61. Gravatar of PRXCTB PRXCTB
    8. December 2017 at 12:57

    @matt

    I think we agree, for the most part. I said earlier that the illegal transactions use case is the most likely outcome for BTC in my mind, but there are lots of unknowns and I imagine some of the other futures which you seem to dismiss as impossible are possible but unlikely.

  62. Gravatar of Matthew Waters Matthew Waters
    8. December 2017 at 14:44

    Bitcoin’s transactions currently use electricity at a rate equivalent to whole country of Denmark.

    https://arstechnica.com/tech-policy/2017/12/bitcoins-insane-energy-consumption-explained/

    I mentioned energy costs once, in passing, as a drag on Bitcoin transactions. Electricity costs are one area where miners could be holding the bag, like with all the dark fiber after 2000.

    Selling some item back and forth at prices much higher than fundamental value is mostly zero-sum. Let’s say the Tulip bubble happened as most people think (I know some historians disagree). Prices for tulips went up significantly. Then they plummeted. 90+% of the Tulip bubble was a pure transfer, based on who sold at the right time. The remaining value is real money spent on transaction costs.

    Looking at money going in and out of Bitcoin as a whole, electricity costs are a drag. To be sustainable, the future long-term value has to overcome those transaction costs. Since it looks very unlikely Bitcoin will be currency for legal transactions, it has to get some “virtual gold” property as store of value. I just find it unlikely. For one thing, physical gold is alive and well.

  63. Gravatar of Lorenzo from Oz Lorenzo from Oz
    8. December 2017 at 16:02

    “but we now know that this is not the case.”
    A paradigm case of truth talk.

    “They think that truth is some sort of objective reality out in the world, which we can grasp. Perhaps (they think) the bubble theory can still be shown to be true, but for a price of $10,000, not $10. Sorry, things don’t work that way. In fact, there is no objective reality. True ideas are simply useful ideas.”
    A denial of truth talk.

    “Useful ideas”
    Classic substitute for truth which turns out to either (1) be truth by another name or (2) a failed substitute for truth.

  64. Gravatar of James Alexander James Alexander
    8. December 2017 at 23:12

    “In fact, there is no objective reality”. Is that a fact?

  65. Gravatar of Christian List Christian List
    9. December 2017 at 12:52

    Matthew,

    is it possible that you are mixing up mining costs with transaction costs?

  66. Gravatar of Matthew Waters Matthew Waters
    9. December 2017 at 17:37

    “is it possible that you are mixing up mining costs with transaction costs?”

    To me, mining costs are part of the transaction costs. I was being lazy using them interchangeably.

    The costs of mining are a transaction costs like the costs of stock brokers maintaining mainframes, servers, data centers, etc. Private ledgers, such as DTCC stock depository or Fed reserve accounts, use substantial security to guard changing the ledger. But the update to the ledger itself, at the mainframe, uses trivial amounts of computation.

    Bitcoin is a “distributed ledger,” which artificially adds complexity to the ledger. A market participant can take a ledger from an untrusted party and have reasonable assurance against double-spending.

    A bitcoin private key shows that you definitely owned bitcoin at one point in time. The private key matches the public key on the ledger. But how do you know the private key is not spent twice? Confirmation waits for an hour to a day generally (6-144 blocks added). With assumption that double-spender does not have 51% of computation ability, enough confirmations makes double-spending mathematically unfeasible.

    Here is a bit more about how bitcoin’s transaction costs really work, to really go deep into it.

    http://www.righto.com/2014/02/bitcoins-hard-way-using-raw-bitcoin.html

    IMO, “transaction costs” are those costs sunk with no possible recovery by market participants. There are two large sunk costs with Bitcoin:

    1. The energy costs and cost of GPU’s for mining.

    2. Ensuring safety of private keys against destruction or theft. Coinbase spends a lot of money safeguarding private key, with 98% offline. Many other online wallets have been hacked. Most end investors are not sophisticated enough to safeguard their own private key.

  67. Gravatar of ssumner ssumner
    9. December 2017 at 18:24

    Brian, Good comment.

    David, Perhaps, it depends just how unfair the coin is.

    Matthew, I don’t think you want to bring up Shiller, who has done a very poor job in predicting stock prices.

    James, You said:

    “We approximate objective reality with tests for what works.”

    Leave out the word “objective”. It’s a meaningless word that adds nothing.

    You asked:

    “Is that a fact?”

    Yes.

    SG, You said:

    “Scott admits that James Harden is a vastly better basketball player than Russell Westbrook.”

    I said Westbrook was better last year and Hardin is better this year. Do you disagree?

    Christian, It’s sad how far over your head you are. Do you not see how useless your comments are?

    Lorenzo, Truth by another name.

  68. Gravatar of Christian List Christian List
    9. December 2017 at 21:29

    Scott,

    when the only thing you got left is personal attacks then I must have hit a nerve.

    @Matthew
    I looked it up and it seems that you are correct. Another good argument that BC could indeed be a bubble.

  69. Gravatar of Matthew Waters Matthew Waters
    9. December 2017 at 22:04

    Scott,

    I just wanted to quote Shiller’s metrics, not necessarily what he himself says.

    You are probably referring to him saying stocks were overvalued, or close to it, in Feb. this year. He also said stocks could go 50% higher. It’s similar to what I’m saying about Bitcoin. You can have a fundamental misvaluation and that misvaluation could get worse before it gets better.

    Anti-EMH people that I agree with make clear they cannot predict short-term market movements. Your argument against them seems to be “they cannot predict market movements.”

  70. Gravatar of ssumner ssumner
    9. December 2017 at 22:13

    Christian, The boredom nerve.

    Matthew, No, I’m referring to his claim they were overvalued in 1996, and again in 2011. I’m referring to his entire career. If his model is useful, why is his forecasting career so dismal?

  71. Gravatar of Matthew Waters Matthew Waters
    9. December 2017 at 22:15

    FWIW, my personal feelings on stocks are that they aren’t fundamentally overvalued still. Inverse P/E is 3.3% and 10 year yields are 2.4%. A <1% premium is lower than historical averages, but stocks have also been undervalued historically.

    So I disagree with him saying to sell stocks now. The sources of earnings would have to be especially unstable for stocks to not outperform bonds over 10+ years, even at current stock values.

  72. Gravatar of Matthew Waters Matthew Waters
    9. December 2017 at 22:21

    Sorry, I didn’t know about the 2011 predictions. I saw a lot of other people wrongly not adjusting P/E for interest rates. The “historical average” P/E compared to today will of course be really wrong, because you’re comparing 10% rates to 0% rates.

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