You Don’t Need A Nobel Prize To Be Wrong About Bitcoin, But It Helps

demise02 Mar 2014 / Forbes – The internet may have brought us unlimited sources of news and opinion, but the New York Times still has powers that few of the new generation can muster. Among those is the ability to claim two Nobel Prize-winning economists among its staff: the op-ed columnist Paul Krugman and Economic View’s Robert Shiller. Back in December, Krugman declared: “Bitcoin is Evil” and after the Mt. Gox exchange for the electronic currency declared bankruptcy in the past week, taking with it millions of investors money, some might argue he had a point. Shiller took that event as his chance to pile on Bitcoin while it was down: “ The central problem with Bitcoin in its present form, though, is that it doesn’t really solve any sensible economic problem,” he wrote in yesterday’s Times.

Bubble trouble?

Schiller could scarcely be more wrong about that “central problem” thesis, which we’ll get to in a moment. But he does raise an important question about the wild gyrations of Bitcoin’s price over the past year. “The Bitcoin phenomenon seems to fit the basic definition of a speculative bubble — that is, a special kind of fad, a mania for holding an asset in expectation of its appreciation,” he wrote. “The instability of Bitcoin’s value in dollars is a measure of failure, not success.”

Jean-Paul Rodrigue , a Ph.D. who teaches at Hofstra University, came up with a model that defines the stages of an investment bubble. It looks like this:


Now here’s a chart of Bitcoin over the past year, using data from Coinbase, a leading Bitcoin exchange:

Screenshot 2014-03-02 05.52.10

Keeping in mind that Rodrigue’s chart is a model, not a precise guide for what every single bubble is going to look like, reasonable people could argue that we’ve had the full run up to the “new paradigm” stage — and that the investment in so many Bitcoin companies, including Coinbase, attests to that — as well as the “return to normal” peak. But so far, what we haven’t seen at all is the fear from the Mt. Gox implosion leading to the capitulation and despair stages of Rodrigue’s model. They still might. And there are reasons why I believe that might be the best thing for Bitcoin in the long run, but it’s worth examining what is actually happening as best as it’s understood…. Read more

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