Stop saying Bitcoin prices are tulip mania

It seems like you can't make any references to Bitcoin without someone inevitably making a reference to tulip mania or that it's some variation on a ponzi scheme, and saying Bitcoin is in this huge speculative bubble that's going to inevitably crash and take everyone who wasn't smart enough to get out while they were ahead with it. Cue the exasperated sigh here. sigh

The problem I have with these claims isn't the fact that they're saying Bitcoin is a bubble - go ahead and say what you want, that's your viewpoint. No, the problem I have is that most of these claims don't come from a voice of concern or of serious investing advice, they come from a voice of conspiracy that's comes across as trying to belittle the ideas behind Bitcoin by looking at short term trends without actually making an effort to understand the principles behind what's happening. I'm going to focus on one article in particular for the rest of this post, but keep in mind this applies to many of the similar claims that you might see elsewhere. The article in question is this piece from NewsTarget claiming that 99% of Bitcoin owners are screwed if they try to sell.

Let's start off with the math. Yes, it is true that if everyone decided to unload all of their Bitcoin at once, supply would very quickly outpace demand and the price would crash to near zero (or literally nothing if there were more sell orders than buy orders). You know where else you could potentially see this kind of phenomenon though? Stocks & assets. Here's a snapshot of some current share statistics from Yahoo Finance on shares of Apple:

The two numbers I want to compare here are shares float and average daily volume. Shares float is the total number of shares available for trading (similar to the total number of Bitcoins available) and average daily volume is the average number of shares that are traded on a daily basis.

There's a bit of an apparent disparity here, and that is the amount of Apple shares that are traded on a daily basis is far exceeded by the shares float. As a percentage it's around 0.47% in total. I don't think it's much of a stretch to say that if everyone decided to sell all their Apple shares at once, eg. because Apple got vaporized by nanobots from outer space or something, they would be faced with the same problem as all Bitcoin holders in this hypothetical scenario. Granted this doesn't take into account the total amount of buying interest that could happen if the price lowered, but in general I think it's safe to say that if everyone wanted to sell their shares all at once, not everyone would be able to get out.

The article then goes on to make this claim:

The very fact that Bitcoin needs new people buying into the system in order to support its rapidly advancing prices is almost the classic definition of a Ponzi framework.

Apart from being somewhat dismissive, I feel like this statement doesn't do justice to the potential utility of Bitcoin and the reason why it was popular in the first place. I don't think it's hard to argue that most people consider Bitcoin as a currency - there's no doubt about that. But that's only half the story, because we should also consider that Bitcoin is about the blockchain technology that powers it - it's an incredible application of public key cryptography that can literally allow you to say "I own this virtual unique thing and nobody else can". The fact that it's a currency is really just a byproduct. Feel free to disagree with me on that assessment, but I will say it's probably not a coincidence that a lot of the altcoins that exist right now are experimentations on the blockchain technology.

Yes, Bitcoin does need more people to buy-in in order for it to go up in price - without anyone willing to exchange for it an asset becomes basically useless. Again, this is how asset trading works. If you want Bitcoin to be worth something, you need a lot of people using it and therefore a lot of people buying into the system. Think about gold for a second - is it valuable because it inherently has value or because a lot of people think it's valuable and are willing to pay certain market prices for it? Assets don't go up in value over time because of some higher power - they go up in value because people start to value them more over time. Just because something requires buy-in doesn't automatically make it a ponzi scheme. Why should "virtual gold" be any different?

To call Bitcoin a ponzi scheme (or near-ponzi scheme) is to essentially eschew the potential utility that made it popular in the first place. There's actually a difference between ponzi schemes and bubbles. I won't go into details here (that's what the link is for), but the essence is that while both will result in a market crash and a potentially huge financial loss, one of them happens because it's a fraudulent investment operation and the other happens because it's an asset that is far too overvalued to sustain it's market value.

In fact, let's talk about the notion of Bitcoin being in a bubble for a second. A lot of detractors like to point out tulip-mania as a parallel to the hype around Bitcoin and that we're going to inevitably see it crash at some point in the future. "Bitcoin is in a bubble, and you better get out before it pops, just like tulips did!" Or so the argument goes. Here's the thing though: tulip-mania being a bubble may have been a bit of a myth. Stratechery has a very good article explaining this idea and how it relates to Bitcoin, but here's the important bit:

As Thompson explains, tulips in fact were becoming more popular, particularly in Germany, and, as the first phase of the 30 Years War wound down, it looked like Germany would be victorious, which would mean a better market for tulips. In early October, 1636, though, Germany suffered an unexpected defeat, and the tulip price crashed, not because it was irrationally high, but because of an external shock.

In essence, the crash happened not because the price was over-inflated, but because circumstances changed to make tulip possession less valuable to the market. There are other theories economists have put out as well, but the general sentiment is that it may not have even been the phenomenon that many people claim it is today. Of course, there's a lot I'm skipping over here so it's worth looking into if you want to know more about it - I'm just saying I don't think tulip mania applies to Bitcoin in the way people think it applies. There's one more quote from the Stratechery article I'd like to share as well:

As I noted above, I would not be surprised if the ongoing run-up in cryptocurrency prices proves to be, well, a bubble. However, bubbles of irrationality and bubbles of timing are fundamentally different: one is based on something real (the latter), and one is not.

I'm not trying to argue that Bitcoin isn't in a bubble - it very well could be and the value could come crashing down at some point. But you can't just look at all of the attention and hype surrounding it, see the prices spike the way they currently have, and automatically say that it's tulip-mania fad that will pass just because you don't see the value in it. Maybe it is possible that Bitcoin will go away some day or maybe people will actually stop valuing it in the future, but if that's the case then it's unlikely to happen just because of a bubble.

If people are getting excited about something it's a good idea to try to understand why that is. It doesn't help to just say it's all hype and no substance because you happened to "do the math" and are now disagreeing with the ideas behind something. By all means go ahead and criticize Bitcoin and the over-attention it might be getting, that's how we can learn to address and accept and deal with problems it has. But don't go around spreading FUD as if it's fact - that doesn't help anyone.

Photo Source