As Bitcoin Bubbles, Cassandra’s Chorus

What do you get when a group of esteemed observers and participants in the financial system — among them Nobel laureates and billionaires and not a few government officials — chime in, as one, about the lures and lunacy of unchecked speculation?

You get cause for concern. Food for thought. And enough IQ points, wealth and wealth of experience to give even the most cheerful of bitcoin boosters pause.

Or at least pondering a pause.

Beyond the headlines concerning price — it’s up, it’s down, $11,000 or $10,000 or what it would have been like to get in on the ground floor and suddenly be a Millennial millionaire — we’ll deal less with the mechanics of the bidding and more with the observations about mania, mindfulness and just what may be afoot when cryptocurrencies turn cryptic.

About the mechanics: Turns out the bitcoin machine is anything but a smooth one — perhaps more Rube Goldberg than anything else.

News broke this week that bitcoins have bit some dust, literally, having moved on to some nether region of cyberspace where they cannot be found. At all. There are roughly 16.7 million bitcoins out there, but a digital forensics firm called Chainalysis has said that as many as 4 million of them could be lost. That means billions of dollars gone.

That should make participants in a market where the total capitalization is more than $160 billion (at last count) uneasy. After all, value can be ascribed only where one knows how many pieces of something they own (we use the term “value” loosely here). How do you prove you had it if it is gone, with nary a trace? You’ve heard the term paper millionaire — now meet the digital indigent.

Among the notable observations of the last several days: Ken Griffin, billionaire hedge fund manager, told CNBC that bitcoin smacks of Tulip mania from centuries past (he did say that blockchain has its uses, which might be “profound,” as applications as secure records of transaction evolve). Likewise, Carl Icahn, who also is in the ranks of billionaire Wall Street heavyweights, has said bitcoin “seems like a bubble” and that he prefers to stay away from investments where he cannot understand why people are bidding the price up.

Those comments came as the stock price of bitcoin rose more than $11,000 and then promptly fell to around $9,700 and then shot back to a recent $10,480.  Notably, the price, when it fell, got slammed by 20 percent in about an hour and a half, which gives a little eye-popping insight into how volatility is sometimes treacherous. The recent buoyancy comes from the fact that the U.S. derivatives exchange CME is now certified to list bitcoin’s futures contracts, an event that will happen mid-month.

But might it be that with wider availability comes greater risk? (Proponents would say better liquidity and transparency.) Consider the fact that Federal Reserve Vice Chairman for Bank Supervision Randal Quarles said yesterday that without the backing of central banks, among other things, danger lurks.

As for the Nobel perspective: Prize winner Joseph Stiglitz has said the cryptocurrency should be outlawed. Fellow laureate Robert J. Schiller, who, as Bloomberg focused on asset pricing, said at a conference this week that a crash looms, summing up the allure thusly: “Bitcoin — it’s just absolutely exciting. You’re fast. You’re smart. You’ve figured out nobody else understands. You’re with it. And bitcoin has this anti-government, anti-regulation feel. It’s such a wonderful story. If it were only true.”

Truth vs. speculation? Hope vs. fact? To take a line from Emily Dickinson: Hope is the thing with feathers, while bitcoin is the thing with bubbles.



The September 2020 Leveraging The Digital Banking Shift Study, PYMNTS examines consumers’ growing use of online and mobile tools to open and manage accounts as well as the factors that are paramount in building and maintaining trust in the current economic environment. The report is based on a survey of nearly 2,200 account-holding U.S. consumers.