In December 2017 I wrote a paper titled “What causes asset bubbles” featuring the chart below. A few days later, Bitcoin prices peaked and fell 85% within a year. It seems Bitcoin is back. I believe we are in the midst of another bubble, but this time I am not confident in calling its top. My updated chart and thoughts are below1.
First, let’s not kid ourselves. Bitcoin in its current form is not a viable candidate as a currency replacement. If we measured the US annual inflation in Bitcoin instead of dollars, you’d have seen 275% inflation in 2018, -50% deflation in 2019, -75% deflation in 2020. A healthy society cannot function with that kind of price volatility. The currency must be stable enough that if you get paid on Friday you know what kind of dinner you can buy on Sunday. While it may mature in the future, Bitcoin as it exists is largely a speculative asset. Read More