Some thoughts on the bitcoin bubble and when it will burst

Today we consider bitcoin.

I hope my opinion on these pages has been pretty clear.

On the one hand it is a breakthrough technology with world-changing potential. It is that big.

On the other, it’s a speculative mania. And speculative manias do not end well.

So where does that leave us?

Nocoiners should cover their ears at this point

The problem I have with most “bitcoin is a bubble” arguments, is that most of the people making the arguments are uninformed.

Either they have never used the technology; or they don’t understand the difference between cash and money; or they can’t see the inherent problems with debt-based fiat currency; or they don’t get the value of a deflationary system of money in limited supply; or they can’t envisage the colossal power of decentralisation; or they can’t see the immense implications of a technology whereby value can be sent anywhere there is internet access, across borders, at low cost, with no middlemen involved.

Usually, it’s a bit of everything.

“It’s a scam, it’ll never work, it’ll be regulated out of existence, it’ll be shut down, I don’t understand it, it’s not backed by anything, why do we even need it?, you’re not going to ever buy your groceries with it, it’s only used for illegal transactions” and so on.

All these arguments are so easily dismantled that they carry very little water, as far as I’m concerned.

In its typically subversive way, someone in the bitcoin community has now come up with a word to describe such people: “nocoiner”.

According to Urban Dictionary, a nocoiner is “a person who has no bitcoin. Nocoiners (usually socialists, lawyers or MBA economists) are people who missed their opportunity to buy bitcoin at a low price” and “are now bitter at having missed out”.

Urban Dictionary continues: “The nocoiner takes out his or her bitterness on bitcoin hodlers [the misspelling is deliberate], by constantly claiming that bitcoin will crash, is a scam, is a bubble, or other types of easily-refuted FUD [fear, uncertainty and doubt].

“Nocoiners have little to no computer skills or imagination; even when they see the price of bitcoin go up and its adoption spread, they consider all bitcoin users to be in a collective delusion, with only themselves as the ones who can see what is happening.”

This definition is bound to wind up anyone who doesn’t own bitcoin, because it hits a nerve. Anyone who doesn’t own bitcoin has missed out on the greatest money-making opportunity any of us will ever see in our lifetimes.

The longer they’ve known about it, the more it hurts that they’re not super rich. The price has proved them wrong. The easy way out is to dismiss it as a bubble.

And it is a bubble! But at the same time, there has been a bubble of people who don’t get it saying that bitcoin is a bubble – and that has made me think bitcoin has further to go.

The genuinely decent – and troubling – arguments against bitcoin

However, over the last few weeks I have stumbled across two or three very well reasoned critiques of bitcoin, which go far beyond nocoiner hot air. To my mind at least, the case for bitcoin is not quite as strong as it was.

The limited supply argument is undermined by the proliferation of “forks”, “altcoins” and ICOs (initial coin offerings). The “cash for the internet” and micropayments arguments are undermined by the long transaction times and high costs of transactions. The decentralisation arguments are undermined by infighting among the core developers. The “breakthrough technology” argument is undermined by the inability of the network to handle the growth in volume.

As a disillusioned gold bug, I’m not so sure that fiat money is as doomed as I once thought it was.

The other uses for blockchain technology – smart contracts; distributed storage, computing and messaging; authenticity verification; stock issuance; voting – are also running into their own challenges. For all the euphoria, a lot of investment, innovation and development is needed before blockchain tech actually usurps existing systems.

It will happen. But not tomorrow. Time, money and a lot of hard work are needed first.

It’s like the gold has just been discovered. Everyone has got very excited. Now reality is starting to set in about just how much equipment, investment, manpower and – perhaps above all – time is needed, before we can actually start pouring the gold.

Even the libertarian arguments are challenged by the argument that users may actually need some protection. When the proliferation of ICO scams are revealed as such, and investors lose their capital; when rookies have their coins stolen; when prices start falling and gains become losses – many may not feel quite so strongly about their high libertarian ideals as they once did.

I’m not saying any of the above arguments are right or wrong, by the way. My point is that I am detecting a slight shift in the narrative. Not your typical, ignorant, nocoiner guff – but something much more substantial.

The future for crypto is not the plain sailing the price would have you think it is. There is a lot of grind to get through first before widespread adoption becomes a reality.

US tech research company Gartner is known for, among other things, its excellent hype cycle chart, which describes the journey a new technology goes through from original inception through to widespread adoption.

Here it is:

Gartner's "hype cycle"chart

This is an idealised cycle. If everything evolved in cycles as precise as this, we would all be a lot richer than we are. It is, however, is a useful guide.

The easiest analogy is dotcom. In simple terms, the 1990s were the “Technology Trigger” phase. Everyone got very excited about the internet – though few actually used it.

Then we got the dotcom bubble – 2000 saw the “Peak of Inflated Expectations”. The bust brought us the “Trough of Disillusionment” from 2001-04. All that money was lost, broadband was still so slow, and adoption was not yet widespread.

Ever since the internet has been marching up the “Slope of Enlightenment” and over the “Plateau of Productivity”. Only recently has the Nasdaq passed its 2000 highs.

Where are we now in bitcoin’s hype cycle?

I actually argued that bitcoin hit its own “Peak of Inflated Expectations” back in 2013 when it went to $1,200 a coin. Based on this cycle, I said buy bitcoins back in spring 2014. Blockchain tech, however, was still in the “Technology Trigger” phase, I remember saying in talks at the time. Many were saying that blockchain had hit the “Peak of Inflated Expectations” back in 2016 – and yet bitcoin’s gone ever higher.

Now it looks as though both bitcoin and blockchain tech are somewhere at the “Peak of Inflated Expectations” phase all over again. That’s the problem with idealised cycles – it’s all a bit arbitrary and you can manipulate the cycle to suit whatever narrative it is you want to peddle.

However, my point is this: close to the “Peak of Inflated Expectations” you will see “Negative press begins”. Bitcoin has been dogged with negative press ever since the start. The idea of non-government money is inherently political, so bitcoin divides opinion and always will. But it’s only now that I’m detecting rather more informed negative press, which would indicate a changing narrative.

I’m not calling the top. It may be that we saw that a fortnight ago at $20,000. It may be that bitcoin wants to go to $100,000. Who knows? I suggested in my own New Year predictions piece last week that bitcoin could go to $50,000 this year.

But I’m aware that it could just as easily crash. We saw in the lead up to Christmas how quickly bitcoin can fall. It went from $20,000 to $11,000 in three or four days. I think that was the fifth correction of 30% or more in the course of a single year. We’ve also, of course, seen just how quickly it can rally back up again.

I do think it’s wise though, as previously outlined, to have an exit strategy in place – and to practise selling even if it’s only a small amount, so that you know what you’re doing and can move quickly in the event you do want to get out of this market.

I have a technical indicator I use based around moving average crosses and it actually has bitcoin on a “sell” signal at the moment.

But dare I short it? No.

  • Comment_Cop

    This is a really good write up.

  • Good article! Although you ignore the upcoming Bitcoin upgrade, the Lightning Network, which will obliterate the slow and expensive transactions problem, and will allow Bitcoin to handle an order of magnitude more volume than VISA, and faster. It will also vastly outperform competing alt coins. The technology isn’t static. In this case the demand outgrew the pace of technological improvement. But not for long.

  • Thanks Dominic. I guess nobody really knows where bitcoin will stop, relative to fiat. For me the bubble isn’t so much bitcoin’s price itself but the proliferation of altcoins. It’s tempting to think that at some point, issuance will come to an end. After all fiat is required to pay taxes, and for government spending, so there will always be demand for it. But that says nothing about the price of crypto relative to fiat continuing while people swap one for the other.

  • dlp6666

    Any thoughts on the bitcoin ETF trackers like BIT-XBTE and ETH.XBTE (both currently popular on Hargreaves Lansdown) as ‘conventional’ ways to gain exposure (at the ‘right’ time)?

    • Nick

      But aren’t betting instruments such as ETFs the effect of excess ‘money’ the fiat provides…..or….. what would the price of the thing (btc) be, if one was forbidden to bet on the price of the thing (btc) via ETFs……. ??? …… would it be higher????….. if so, we might say ETFs are an effective way of reducing (or manipulating?) the ‘price’ of the underlying ‘asset’..?? ….
      ……or not.

  • Michael T

    I enjoyed your presentation of both sides.

    For me the current challenge is the notion that Bitcoin et al are a “store of
    value”. I believe that the “value” is being measured by what people have the most of, are most familiar with, and (most importantly) desire and need: Fiat currency.

    When Bitcoin et al is evaluated against a chosen Fiat currency, the comparative “value” of Bitcoin et al is observed as fluctuating wildly. It is hard to accept Bitcoin et al as an actual STORE of value therefore. It should be noted that different crypto currencies fluctuate wildly against each other as well, and so its is not simply the Fiat currencies that may “lose value” (or otherwise) against a chosen crypto coin. This fluctuation in value against a Fiat currency, though, is precisely why people are trading in the coins (I’m not sure that many ar actually “using” the coins though?). You wrote above about nocoiners: “Anyone who doesn’t own bitcoin has missed out on the greatest money-making opportunity any of us will ever see in our lifetimes.” I suspect that it is only “money-making” because people consider how much Fiat currency “money” their Bitcoin can be (or has already been) converted to!

    In my view Bitcoin et al can only be a useful store of value when it is accepted as
    something people actually want for its own use and worth, and not while it remains something that is appreciated purely because it has increased or might increase the amount of equivalent Fiat currency owned when it is eventually sold on to the next speculative buyer.

    IF (as many say) the real value of Bitcoin et al is not the coin itself per se, but the
    underlying technology, I would suggest pegging the Bitcoin et al to FIAT currency (for some period of time) so that the technology has a chance to be appreciated, used and accepted by the many with the coin “value” stabilised. While the coin side of this remains a speculative investment / bubble enjoyed (or otherwise) by the very few who participate in these things, its alter ego (the technology) will not be able to develop sensibly in its own right to bring the abundance of new capabilities that are envisaged.

    • Nick

      But you are suggesting to peg (rig) / (manipulate) the ‘price’ of something that is *limited* in supply against something that is *unlimited* in supply??

      • Michael T

        Dominic wrote above: “The limited supply argument is undermined by the proliferation of “forks”, “altcoins” and ICOs (initial coin offerings).”

        I am suggesting a way that may help to stabilise the perceived value of the “coin”(s) and tame the associated speculation. This so that the technology and usage, the suggested real reasons that the “coin”(s) are believed to exist in the first place, are able to evolve and be appreciated.

  • Pixel8r

    Plan your exit? Trouble is that the exits will be shut when there is a rush to sell. Hodl’s will be left having to hodl while the watch the price drop and drop.

  • Phil

    I think to say that “nocoiners” have missed out on the greatest money-making opportunity any of us will ever see in our lifetimes is a bit misleading and is part of the false conception that drives the fear of missing out mindset that ends up causing people to lose money.

    It’s logically impossible for the total group of people who buy bitcoin to make more money on average than those who don’t, as no wealth is created it is simply moved from one person (the buyer) to the other (the seller). The average amount of money made by those speculating in bitcoin is exactly zero (the same as the average made by those who don’t).

    The more people who have made money on bitcoin already (those who have already sold at a profit, not hodlers) the less likely it is for future buyers (or holders) to make money so unless you were in right at the start the chance of making money is actually less than by not buying at all. The nocoiners could therefore just as accurately, if not more so, be said to have avoided the biggest money losing mistake of their lives.

    The high price of bitcoin makes people think lots of people have made money, whereas for many it will prove to have been an illusion. When people try to sell in numbers and there aren’t enough willing buyers (now spread thinly amongst the many other cryptocurrencies) it will be known who has really made money and the many more who have lost money. I suspect many of those who didn’t sell at these prices will then be the ones regretting missing out on the biggest money making opportunity of their lives.

    • Michael T

      You raise a very good and important perspective Phil.

      Again you illustrate the main reason for those that acquire bitcoin, or other crypto coins, as the intention of disposing of it for a higher amount in Fiat currency than was paid. That is where the value is seen. NOT in actualy having the crypto currency itself.

      I look forward to reading an article where someone actually gives a (valid) different reason for holding and using crypto currency. I have read a few articles in Moneyweek where, for example, someone selling a house or an island insisted on being paid in Bitcoin. No mention of the reason why really. By that I mean, why wouldn’t being paid in USD or GBP do the job I wonder? If you were desperate for bitcoin you could always exchange the Fiat for the bitcoin later. I look forward to someone explaining in response to this post!

      Inventing reasons for needing bitcoin is again playing on the “fear of missing out mindset” as you put it.

  • Carnabwth

    I would like a spot of advice. If you have some Bitcoin as I do, what’s the best way of selling? I guess that means which exchange is the best at the moment? Mind you, I am not intending of selling. I didn’t pay much for them so I’ve nothing to lose. Thanks.

    • Tony Short

      I use Coinbase and Spectrocoin. You need to be aware that, since no UK banks will allow crypyocurrency exchanges to have GBP accounts, they bank (typically) in Estonia and therefore you can only withdraw Euros. You will pay a fee to your UK bank to convert Euros to GBP and you will also lose a bit on currency exchange.

    • David Hardcastle

      Use bittylicious i have used them many times and they use bank transfers to pay sterling from other uk accounts.

      I have used this site many times to buy and sell. The fact your bitcoin is held in escrow is reassuring.

      Only thing you may find is spread fluctuates and is less competitive off peak hours.

      I have heard of two friends being royally screwed over by Coinbase and wouldn’t touch them with a barge pole.

  • hohum

    “nocoiners have missed out on the greatest money-making opportunity”….

    And awful lot of Bitcoin hodlers too will soon experience the same! Without the inconvenience of parting with fiat.

    “Nocoiners dont understand bitcoin”. Not much evidence hodlers do either!

  • Nico Metten

    If completely unpredictable assets count as investment opportunities, then you can always buy a lottery ticket. I just read that two people in the US both won over 1/2 a billion $ with their ticket. That return dwarfs anything we see in cryptos. It is nonsense to assess investments in hindsight. A real investment can be bought on the basis of its fundamentals, which should be known at the time of the purchase. Everything else is gambling. And gambling tends to be a zero sum game. For every winner there is a loser.

  • David Hardcastle

    Could any one recommend a decent, low risk way of gathering up uncollected Bit cash and other forked bonus coins?

  • Bab Boon

    A question in all seriousness:

    What’s the TAX position vis Bitcoin & other cryptocurrencies?

    Some of the most speculative trading options (Spreadbetting, CFD) are exempt from Tax – Apparently on the grounds HMRC calculate more people will loose money engaging in such trades and, were profits taxable, that opens the door to making losses tax deductable.

    To my mind (blinkered tho the view may be) ‘investing’ in cryptocurrencies is orders of magnitude more speculative.

    From that it follows HMRC should be confirming cryptocurrency trading profits are outwith their scope and tax free OR that whilst profits are taxable losses are tax deductable.

    Anyone know the answer definitively?

    • Perry Mason

      CFDs are not tax free as I understand it. Capital gains tax would be payable in general. It doesn’t matter what the underlying asset is, bitcoins or pork bellies etc. However spread bets are tax free.