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Stop Asking If Bitcoin Is In A Price Bubble. Ask These Questions Instead.

The debate regarding whether or not bitcoin is in a bubble is essentially as old as the cryptocurrency itself.

But as Noelle Acheson and Damanick Dantes recently pointed out in their opinion piece for Coindesk.com, (which I implore you to read) the answer is far more complex than the binary ‘yes or no’ nature of the question itself. Only time will tell if / when the bitcoin bubble will burst, if / when bitcoin’s price will reach a new all time high, if / when another asset will make bitcoin obsolete. But only an informed understanding of the asset itself will drive each of these conclusions.

Instead of directly weighing in on the answer to the bubble question, they offer questions that traders and investors should ask themselves while reaching their own conclusion. The asset bubble question should be entirely framed within an assessment of the intrinsic value of the asset. The unprecedented and decentralized nature of bitcoin naturally means that estimating this intrinsic value is… difficult. There are not the same traditional financial signals to consider as a starting point. There is no centralized entity guaranteeing its worth. There is no true comparable that offers a parallel reference point.

Electricity consumption, mining infrastructure costs, transaction volumes, and thousands of other indicators offer an inconclusive trail of clues. But rather than looking at current day prices and indicators, investors should be considering future use cases of bitcoin and its place in a new financial ecosystem.

Instead of questioning the output (Bubble? Yes – or – No), investors should be questioning the inputs that make the world’s leading cryptocurrency have any value at all. The authors ask:

What is the “fundamental value” of a good that does not fall in value along with the underlying currency, that does not suffer the consequences of a weak economy, and that cannot be co-opted to provide profit for a select and powerful few? 

What is the “intrinsic value” of a technology that also allows for the auditable, immutable and censorship-resistant sharing of information? 

How do you assign a baseline price level to a cryptographic token that embodies all of this, and can also be used as a payment innovation as well as a seizure-resistant emergent store of value?

How many people ask themselves these sorts of uniquely informed questions when evaluating the bubble question? For bitcoin to be in a bubble, investors must determine that the market price of bitcoin reflects a value in excess of the realizable potential of these questions. But how can we begin to determine the future value of these capabilities?

This challenges both long and short traders to consider a bubble in a new light, beyond the current market price. Rather than asking if the price of bitcoin is rational, ask what is the potential of its functionality. Instead of asking if bitcoin’s price is too high, consider the value of this capabilities in the future. There will undoubtedly be bumps along the way and its entirely possible that the current price is too high, too low, or just right. But these are the questions that will inform the bubble conclusion, not just a rapid or seemingly irrational rise in price.

So next time you are wondering if bitcoin is a bubble, ask yourself a far more revealing question about its place in the future instead. Are these functionalities necessary in your view of the future? Will society value them at this price level in the future? Will there be other solutions that will prove to be far more effective in the future?

As they conclude at the end of their article, “Bubbles are not about prices – they’re about price relative to value.” Investors need to keep this ‘relative to value’ point in mind when evaluating the current and future potential of not only bitcoin, but all other digital assets.

 

Daniel Pinto – Market Analyst @ TradingBull.io

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