Bitcoin is in a bubble waiting to burst !

I was reading the transcript of the interview by Dr. Prannoy Roy of Prof. Raghuram Rajan and others, where they talk also about Bitcoin. And you can relax, Bitcoin is not in a bubble and it is not going away ! 🙂

When asked by Dr. Prannoy Roy about Bitcoin being a in a bubble, Prof. Raghuram Rajan replies, “Well, so, I think there are two versions of bubble. One is a pure bubble, which is what the economist version is, is something which is valued only because other people value it. There is no fundamental baseline value.”

Well, that is true for everything and not just about Bitcoin. Someone is willing to buy one kg of Onion in the “Sabzi Mandi” or vegetable market for 28 rupees because they value it worth more than the 28 rupees. The price of the onion is not linked to the cost of cultivating and transporting it but rather the exchange ratio the market accepts for its utility. What is the intrinsic value of Onion ? To a non-Onion eater close to zero and for a willing Onion-eater it is 28 rupees. And by the way, what is giving the fiat currency any value whatsoever ?

Prof. Raghuram Rajan: “I mean, think of Bitcoin. It’s very hard to even spend Bitcoin, remember we’re spending a nation’s worth of energy to try and keep track of Bitcoin, right? It’s a very inefficient asset. The amount of computing power that has to go on to maintain Bitcoin transactions is huge. So, in the longer run, it doesn’t seem to me that this is a viable means of transacting, means of payment. If you take away the means of payment from Bitcoin, it really is an asset with no intrinsic value. It’s a digital asset, which has claims on nothing. So, people value Bitcoin, only because other people value Bitcoin.”

Bitcoin’s value proposition right now is an asset for “Store of Value” and less as “medium of exchange”. And it is not harder to spend Bitcoin any more than Gold and speed of final settlement on bitcoin, the payment network, is faster than any fiat currency payment network. Regarding the very tired argument against Bitcoin that it is “a very inefficient asset” which consumes lot of computing power and electricity, there is an utility in the consumption of the computing power for “Proof of Work” consensus mechanism and in also making bitcoin a hard money which is integral part of the Bitcoin’s value proposition (read more about mining in what is bitcoin?). The PoW dis-incentivizes the miners from including invalid transaction in their blocks as they would not receive the block subsidy. And the predictable hard coded schedule for block subsidy reduction or halving makes Bitcoin the only truly deflationary hard money. As long as consumers of energy are willing to pay the price of the electricity and computing power for mining bitcoins (making bitcoin decentralized) & maintaining bitcoin network (making bitcoin ledger distributed) and it makes perfect business sense to them and creates value for the Bitcoin users, then it is completely worth it ! What is wrong with it ? The onus of supplying clean energy is on the energy suppliers and not the paying consumers of the energy.

Yes and it is absolutely right, “People value Bitcoin, only because other people value Bitcoin”. The people buying and holding bitcoin value bitcoin for it’s utility as an asset for “storage of value”. It is the irresponsible dilution of the purchasing power of Fiat Currency by the governments that is increasing the value of Bitcoin. If the Reserve Bank of India switches from “Fiat Currency” to a “Hard Currency” people would value the “Hard Currency” as “storage of value” and the utility of bitcoin will go down.

Prof. Raghuram Rajan: “When Elon Musk tweets positively about Bitcoin, Bitcoin values go up. But it’s not as if there’s some nirvana down the line when Bitcoin will become the means of payment everywhere. In fact, it’s sort of programmed not to become that. So, this leads to the question, why are people valuing Bitcoin? I mean, the reason is, they are valuing it because others are valuing it. And that is part of the reason why it’s volatile. One day, Elon Musk tweets, it goes up in value. Another day, somebody says this is heading towards disaster, and it falls.”

Yes, Bitcoin is too volatile to be “medium of exchange” in short run. But volatility is not equal to risk. The risk of Bitcoin going to zero is not bigger than the risk of any of the top world religions disappearing and way less than the risk of purchasing power for a fiat currency going to zero.

Prof. Raghuram Rajan: “Now, there are some financial assets like that, some of the high-tech companies, which aren’t producing anything right now, maybe of that kind. But broadly I would say that asset prices are high. I wouldn’t say it’s a bubble everywhere. I think there are, certainly in every country, a fair number of assets, which are fairly priced. But low interest rates are lifting everything, perhaps some beyond what their true value is.

“A fair number of assets, which are fairly price” please enlighten us. Bitcoin is an asset that is increasing in price because of the freewheeling printing machines at the central banks and Bitcoin is the asset “fairly priced” in fiat currency.

You might also be interested in reading more about what is bitcoin?

Disclosure: I have a position in the Bitcoin and may or may not increase my position within the coming days, weeks and months.See my complete cryptocurrency portfolio here. Please read the disclaimer before acting on the information provided on the website. Some of the links in the post may be affiliate links.

References:
https://www.ndtv.com/india-news/prannoy-roys-townhall-with-experts-on-stock-markets-bitcoin-full-transcript-2384510

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