The Bitcoin Bubble Myth

Bitcoin bubble.

https://www.tommy.studio/

Early in 2021, the soaring price of Bitcoin spawned the usual comment that has haunted the Digital Cash Project for a decade – that it is little more than a “bubble” fueled by market manipulation and euphoria.

But for those who have grappled with this phenomenon for years, the charts are the most recent sign of another reality: Bitcoin, a true monetary invention, outperforms government money in a natural free market competition.

Contrary to how Bitcoin is discussed elsewhere, this article claims that a body of evidence has emerged to suggest that the software created a real – albeit misunderstood – economy, and that it is Economy, albeit slowly, within the economy established global monetary order.

In fact, it seems likely in the coming year that one of the biggest criticisms of Bitcoin – that its price is irrational and speculative – will be shown to be inaccurate by data that better describes it as cyclical and predictable.

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If this possibility seems surprising at first, we just need to look back on Bitcoin’s history to examine the claim. After the 2017 market euphoria, skeptics and believers were divided on a single question: How do we understand an asset with a value between zero and $ 20,000?

Both groups developed different hypotheses and as the market cooled they came to different conclusions as to why the price fell again.

For the mainstream, the answer was the simplest model. A rapid surge in new crypto assets and an increase in trading venues (some of dubious legal status) had once again fueled a market that was overly driven by inexperienced investors.

Bitcoin enthusiasts were skeptical of this conclusion. After all, there was a new money technology to be reckoned with, the economy of which was a little over a decade old.

They asked various questions: How did prices fall again despite the attention of investors and the media? Why was the 2017 graph so similar to the 2013 “bubble”? And why did the price declines in 2019 and 2020 stop at a level that was well above the values ​​observed years ago?

To answer these questions, a new hypothesis was put forward: what if Bitcoin’s price bubbles are the product of its programming?

Bitcoin is not the price of bitcoin

Understandably, the notion that Bitcoin could be the cause and not the effect of its price booms and busts requires an initial lifting of disbelief. For the purpose of this article, however, I would like to invite the reader to do just that as we go through the basis for this imagination.

Let’s start with the obvious: Bitcoin has no price. That said, from a code standpoint, bitcoins are just finite data. It is the market of global buyers and sellers for this data that evaluates and applies the generally stated “price”.

From here we can see where the idea that speculative manias are causing Bitcoin’s price increases has its roots. The market always sets the price for bitcoins. How can Bitcoin software affect this activity?

The answer lies in the programming of bitcoin and how it defines the availability of bitcoins in its economy. As stated in the code written by Satoshi Nakamoto and published in 2009, Bitcoin has three properties that set it apart from almost all other global economies.

1. It has a fixed supply of 21 million units (divisible into 21 quadrillion units).
2. It reduces the speed at which these new units are introduced into the economy on a programmatic schedule (every 10 minutes).
3. It has no central operator and instead is serviced by thousands of computers running its software.

Lately a lot of attention has been focused on the third value proposition.

In the wake of government intervention in the markets in response to the COVID-19 pandemic, the mainstream has become interested in alternatives that protect value from political influence.

However, focusing on the third quality means focusing on only part of the story. After all, no investor will buy an asset unless they are convinced they can do it at a cheap price.

Why are Wall Street investors taking another look at Bitcoin? Put simply, they bet on the long-term effects of the first two properties of Bitcoin software on asset price.

Investors like Michael Saylor and Elon Musk look back on Bitcoin’s price development and see a pattern. They are betting on the idea that the Bitcoin market will be volatile, yes, but they are also betting that it will be upward and cyclical.

In other words, Bitcoin price has created relative conditions of stability that allow them (and any investor) to plan for the future.

The story the charts tell

Above, we specified the technical characteristics of Bitcoin, namely that it is a software technology that both skeptics and critics largely agree on.

This brings us to our next claim: Bitcoin asset price is influenced by the parameters of its code and this is the root of its extreme market fluctuations.

For critics, I would like to point out that here our hypothesis enters into a conjecture, although the following is a thesis that takes almost 12 years of observation into account.

As mentioned earlier, believers and critics alike agree that the Bitcoin market was defined by two periods of growth, the first in 2013 (when the price exceeded $ 1,200) and the second in 2017 (when the price exceeded $ 20,000 ).

The hypothesis accepted by critics (consciously or not) is that these were random, euphoric events comparable to this year’s GameStop GME and AMC manias.

Bitcoin price observed on a linear scale.

Messari.io

They justify pessimistically that as Bitcoin price rises, media attention rises, new investors become irrational and older buyers pay off opportunistically.

There is less discussion about what would be a reasonable counterproposal to this claim. How did it come about that the Bitcoin price recovered in order to create the conditions described above? Why didn’t it just go to zero?

You can certainly rule out euphoria. As Bloomberg admitted, Bitcoin price recently rebounded to an all-time high for the third time in history while “nobody was talking about it”.

A likely answer is that limitations in the Bitcoin code are the catalyst needed to restart the Bitcoin economy.

Bitcoin’s performance during each of its four “halving cycles”.

Tweets by ChartsBtc

By reducing the supply of new bitcoins, which were minted with a cadence of four years, the software appears to set the conditions for a four-year boom-and-bust cycle.

Viewed through this lens, it is possible that Bitcoin price is not random at all, but is a function of known parameters that can be understood as a pattern resulting from a stimulus.

Every four years the price rises to a new all-time high, after which it falls to a price set by the top of the previous four-year period, but never falls below it. From there the price rises steadily and the cycle repeats itself until the supply is reduced, at which the supply changes.

If this pattern is to continue, we are about to enter a period when Bitcoin will soon hit new all-time highs for the third time, setting a price level followed by another four-year cycle of predictable performance.

Bitcoin’s price in each of its “halving cycles”.

ChartsBTC

Prove the hypothesis

You may say this all sounds interesting, but it remains dependent on future events. This reaction is understandable.

Personally, I gave up buying Bitcoin until 2018 because Bitcoin was a bubble (or would be replaced by better technology) and I paid a fine (I later spent more dollars buying Bitcoins). You could too.

All of this means that I am trying to introduce a context into this discussion that removes Bitcoin from the lens of traditional market journalism. Bitcoin is not a stock, bond, or state currency. It is an emerging scientific phenomenon and should be understood using the scientific method.

In this context, observers find themselves in the midst of two competing hypotheses. Defining the Bitcoin phenomenon solely through the lens of external events, one continues to present a version of reality (which goes to zero) that contradicts 12 years of data.

The other has been considerate based on Bitcoin’s unique properties and observable data. They argue that with the advent of the Bitcoin economy, the price of assets will rise and that the true value of the Bitcoin system (and its assets) will be orders of magnitude above current levels.

We should also note that these two views cannot coexist. One has to be proven right and the other wrong as they contradict each other.

I believe that the price of Bitcoin will soar to new highs in the coming months. If we do this, we have to ask ourselves whether software that has created the conditions for three “bubbles” every exactly four years creates “bubbles” at all.

If the Bitcoin economy is not a “bubble” what else could burst?

Original art via Tommy Marcheschi