The Bitcoin Bubble Hasn’t Burst . . . Yet

It’s daylight in the cryptosphere.

Prices have started to stabilize from their 2018 lows. Traders have called the bottom. Chartists claim we’re at the start of a new cycle. Many say the worst is over, we’re finally clawing our way out of the devastation wrought by the great cryptocurrency collapse of December 2017. We’ve moved past that madness, and this nascent recovery reflects a renaissance of sentiment and progress. 2019 is the real deal. Bakkt’s coming. Lightning Network’s a thing. Blockchain’s gone corporate. All the crappy ICOs have died. Cryptocurrency is about to go mainstream.

Do you know what I say?

I say we’re far away from mainstream. I say we’re still in a bubble. I say the bubble never popped. And I have evidence to support my opinion.

To be fair, there’s plenty of evidence to suggest bitcoin’s bubble popped at the end of 2017, but I see some things going on that don’t fit the classic “bubble burst” pattern.

Here’s the pattern you look for when figuring out whether a bubble has burst:

Classic graph of how asset bubbles boom and burst.

Don’t pay as much attention to the line as the words around it. In classic bubbles, smart money enters first. These are the innovators and entrepreneurs and individual investors who put their own money into the market. Then institutional investors—i.e., Wall Street, Venture Capital, other big financial companies—move in, sometimes buying assets for themselves, sometimes buying assets for clients and speculators. Next comes the general public. Then things go crazy. Then everything collapses, quickly.

(I didn’t come up with this theory. This model came from Dr. Jean-Paul Rodrigue. For a nice explanation of bubbles in general, read some of Nobel Prize winner Robert Shiller’s books on asset prices).

You can say bitcoin’s 2017 boom fits this model nicely. You can google lots of images from people manipulating the margins and dimensions and scales of bitcoin’s 2017 price charts to kinda-almost fit this pattern if you look just right and ignore some key details. You can find people comparing one year of bitcoin to three decades of gold or six months of Dutch tulip prices during the 1630s.

Let’s stick a little closer to the model I presented above and compare with bitcoin in 2017.

First, institutional investors didn’t get in on the run-up in 2017. Many didn’t know about bitcoin. Of those who did, most faced unclear rules, lack of trading infrastructure, and concern about having already missing the boat. Also, in the U.S., regulations forced $22.5 trillion worth of assets in U.S.-registered investment funds to stay out of the market until they could figure out how to buy bitcoin in a way that complied with securities regulations—and the price collapsed before they could do so.

Second, media attention was scant and short-lived. While it may have seemed like a big deal at the time, an occasional talk-show segment during a three-month hype binge isn’t that big a deal. Most of the hype came from social media, celebrity shills, and your cousin bragging about a swing trade during Thanksgiving break. That’s not mainstream enough to cause most people to give it anything more than an amused curiosity. I found most coverage negative. Did you, too? For a classic bubble to kick into gear, the media attention has to be positive.

Third, the enthusiasm was kept to a very small number of people in most countries. I heard Japan and South Korea went bonkers (is that true?) but other countries clamped down hard. Depending on whose poll you believe, only 2-8 percent of people owned any type of cryptocurrency during the boom. I can count on two hands the number of friends and family who own any bitcoin, without even using all my fingers. Of those who own some bitcoin, most own almost none. Even during full boom. Twitter shills and YouTubers don’t count as enthusiasm.

From what I can see, the only similarity is the “mania phase.” But you get that with anything that gets any hype. People do crazy things. Supposedly people mortgaged their houses and sold their retirement savings to buy bitcoin at $20,000. I don’t know anybody who did that. Do you?

I knew several people (including myself) whose fortunes got crushed during the US real estate collapse. I’ve read horror stories about people who got whacked during the dot-com bust. I don’t know anybody who’s worse off for buying bitcoin.

Last, the post-boom price action is different than what you’d see in a bubble. Take a look:

Source: Coinmarketcap

This chart shows bitcoin’s price from the beginning of 2017 to mid-December, where I believe we hit the bottom or close to it. We started at about $1,000 and ended at about $3,200. Price ended up more than 300% higher than when the bubble began. It’s about the same price today, slightly higher as of this post.

If the bitcoin bubble had burst, the price should have gone back to about $1,000 (if not lower) around the time of either red arrow. Yet this didn’t happen. Even if it does happen eventually, this would not fit classic bubble behavior.

In bubbles, the drop usually happens quickly relative to the run-up. For example, during the 2003–2007 bubble in US real estate, prices dropped below their ’03 levels within 18 months. The six-year dot-com boom gave up all its gains in about a year. Those were long-festering bubbles with massive, sustained growth and real assets behind them. They lost their value over a relatively short time.

Bitcoin’s price is still three times higher than the beginning of the bubble and the “burst” has already lasted longer than the boom.

Also, bubbles leave devastation when they burst. You see a surge in bankruptcies, suicide, panic, margin calls…widespread carnage. Have you seen any of that? Take out ICOs that either broke the law or squandered their money, and you see almost nobody going out of business. Bitcoin development has exploded this past year. More cryptocurrency projects are coming online every day. Knowledge is low and ownership virtually non-existent. Yet interest is still high and still rising. You don’t typically see this after a bubble bursts. Some references:

On top of that, you have institutional investors moving in, not out of the market. Morgan Stanley confirmed this in its report to clients on institutions and cryptocurrency (behind firewall) and several big institutions and endowments already went public about their purchases.

You have progress, new partnerships, and continual technological development on both bitcoin and cryptocurrency in general. New fintech like Metal Pay, upgrades to numerous cryptocurrencies, organic network growth for some cryptocurrency platforms, record years for BitPay and Coinbase, explosion of the Brave browser, steady growth of the DENT network, IBM/XLM partnerships, Factom‘s success, actual running networks not useless tokens…lots of other significant advancements happened in 2018, far from the skeptical eyes of mainstream media. All this activity should help bitcoin gain popularity, which doesn’t normally happen after a bubble bursts.

Maybe I’m wrong. It’s tough to know whether you’re in a bubble when you’re in a bubble. Point is, too many things don’t line up. It comes down to this:

Bubbles take time to grow.

Along the way, the prices go up for a bit, which causes people to notice what’s going on. Even so, most people don’t enter the market until the narrative changes to “it’s safe, easy, and everybody’s doing it.” In 2017, bitcoin was not safe or easy. Almost nobody was doing it. Only the price action looked like a bubble…but if you’ve followed bitcoin for any amount of time, you’d realize the price action is totally normal. If you focus on the price, you’ll miss what’s going on.

You can’t compare bitcoin’s price swings to anything else you’re used to. Bitcoin always moves to extreme highs and extreme lows. Huge rises and spectacular falls are the norm for bitcoin. Its price has dropped over 80% five times in ten years. Its price has gone up over 1,000% four times. In between, its price moves like crazy. Just because it’s up doesn’t mean it’s a bubble and just because it’s down doesn’t mean it’s a bubble burst. Bitcoin is a purely speculative investment. The same applies to every cryptocurrency.

Does this mean bitcoin is still in a bubble?

Nobody knows, but I think so, for the reasons stated above.

One more bit of detail. Instead of looking at that first chart as the 2017 bubble, let’s look a little broader. Compare these charts:


2017 was the first sell-off and the real bubble hasn’t even started yet???

Let’s chat again in April 2020 and swap notes. I present evidence and perspective, not proof.

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