Before we delve into whether or not Bitcoin is a bubble, let’s take a look at some of the most historical bubbles in human history. We will compare the circumstances for each one and whether or not the markets have recovered or completely failed.
1. The Dutch Tulip Bubble ran for a little over 2 years and had speculators pricing some tulip bulbs at 10 times the amount of a craftsworker’s annual income. The market never recovered.
2. The South Sea Company’s share price rose from 100 to 1,000 within a year. Massive selloffs began to occur causing bankruptcies for those who bought on credit. The South Sea Company never recovered and had to be restructured.
3. Japan's Real Estate and Stock Market Bubble took about 7 years for the price to decline. Since the Nikkei’s all time high price in 1990, the index is still 32% below its all time high.
4. The Dot-com Bubble rose 400% from 1995 to its peak in March of 2000, and then found its bottom at about 78% below its all time high. Many companies during this time either went bankrupt or saw their share price retrace 50-90%. Throughout the years of 2016 and 2017, it tested the 2000 all time highs to finally break above resistance.
5. The U.S. Housing Bubble peaked in 2006 and home prices across the US began to decline in 2007. Simultaneously, the extensive risk taking from banks was causing liquidity issues and debts could not be repaid. This butterfly effect rippled throughout the world causing huge retractions in economic growth. Most homes did not recover their value until 2017, but their values have gone back up since. Unfortunately, many businesses and communities around the world have still not recovered, and recent lockdowns from government mandates have halted or wiped out any progress being made to recover economies.
All of the bubbles we have just covered can be attributed to speculation and mispricings based on overexuberance within the market. Some markets end and some require more time to recover. Other markets have fully recovered and reached new all time highs because the underlying assets continue to provide utility for their industries. Similar to real estate or companies that were able to stay in the S&P index, Bitcoin goes through periods of speculation as well, and will readjust to meet realistic demand.
All of the “Bubbles” in Bitcoin
Below is every “bubble” Bitcoin has gone through (prices will vary depending on which exchange is referenced):
High: $0.39 on November 6, 2010
Low: $0.19 on December 10, 2010
High: $29.60 on June 8, 2011
Low: $2.05 on November 18, 2011
High: November 25, 2013 peak of $1,165.68
Low: January 12, 2015 low of $214.08
High: $19,666.78 on December 17, 2017
Low: $3,120.56 of December 15, 2018
Here is a comparison of Bitcoin with some of the other assets we covered:
No other asset has behaved nor can behave in the same manner that Bitcoin has because it is the least prone to human intervention. Just like all markets, the price is manipulated to a degree. But changing the protocols that are already set in place requires consensus from a large majority of participants. Bitcoin goes through “frothy” periods, where the price is pushed to astronomical levels, but it continues to make higher lows and higher highs about every 4 years. These periods are attributed to the halving cycles and distribution rate. In order for bitcoin to be exchanged on the market, they must be mined by computers which simultaneously ensure the security of the network. The more computers that are mining bitcoin, the harder it is for one entity to take over the Bitcoin network.
Every 210,000 blocks (each block is mined every 10 minutes), the block reward is cut in half so that miners receive less bitcoin for the same amount of work. In 2009, the block reward was 50 BTC and in 2020, the block reward was cut down to 6.25 BTC. This process will occur until 2140, when there will no longer be a reward for miners. This programming guarantees the limited supply of 21 million bitcoin.
In the short term, these supply shocks that are caused by the halvings will significantly increase market demand. As time goes on and as more people start allocating their savings to a deflationary asset rather than an inflationary one (like gold, stocks, and other assets tied to fiat currencies), the less bitcoin available for new buyers. As demand grows and supply diminishes, the price of each bitcoin inevitably increases. After each peak, there becomes a consensus among the market that Bitcoin is overpriced in the short term, and market participants (miners as well) sell their positions to make a profit from the sharp increase in price. This process continues over and over again which makes it highly unlikely that Bitcoin is in a bubble. No other asset has behaved in this manner.
“Bitcoin is too volatile” misconception
Once the claim is made that Bitcoin is in a bubble, a second claim usually follows - the price of Bitcoin is too volatile. Not every halving epoch acts exactly the same way, but after seeing Bitcoin’s price break the all time high in 2020 from its previous cycle high in 2017, institutions are taking notice. There is the possibility that Bitcoin’s price action will become less predictable as time goes on, but the stock-to-flow model is proving to be correct for this cycle.
How volatile is an asset if its price action can be predicted every four years? If Bitcoin is able to reach the levels that are claimed in the model, it will be considered the most conservative investment to date. For many in the space, it already is undervalued because of how transparent Bitcoin’s supply metrics are. Only time will tell. There are also some within the space who have stated the possibility that the stock-to-flow model will break to the upside. Institutional players and governments have an enormous amount of funds that may be allocated to Bitcoin in the future. About 0.5%-1% of their treasury reserves in Bitcoin would mean thousands of percent returns to Bitcoin’s current price of $65,000 (08/11/21).
Whether or not the projected models of Bitcoin’s price are successful, it is hard to look past the lack of volatility since Microstrategy and Square began allocating portions of their holdings to Bitcoin. Like any asset with heavy institutional adoption, the volatility decreases as the years go on because of how much institutions invest. Institutions are more likely to hold their positions in an asset over the long term and sell very small percentages at a profit to fund other endeavors. As Bitcoin grows, it’s volatility will diminish. In the last year, we have seen Bitcoin’s volatility decrease to levels that are on par with oil and US real estate.
If we are to see more volatility in the future, the huge price increases and decreases are opportunities for buyers to take Bitcoin out of circulation. Those who have understood the properties of Bitcoin and hold their coins for the long term will continue to greatly benefit from doing so.