I think Bitcoin has room for one more bubble (repost)

Some fun speculation about speculation.

Photo by Zdeněk Macháček on Unsplash

Bitcoin is booming again! The world’s oldest and best-known cryptocurrency has been on an absolute tear lately, and its price has more than doubled since the beginning of this year:

Source: CoinMarketCap

In June of 2022, after the big crypto crash, I went out on a limb and predicted that Bitcoin would see at least one more big bubble (and crash). I had a number of reasons for predicting this, and not all of them have come true. But the basic idea — that Bitcoin would be buoyed by the prospect of institutional adoption — seems to be the reason for the current rally. BlackRock has proposed a Bitcoin ETF, which would draw in a bunch of new people who currently don’t own much or any crypto.

So anyway, I don’t have much to add to what I wrote last year, so I thought I’d re-up that post. After explaining some scenarios for how Bitcoin could top its previous highs, I offer some fun but very amateur speculation on how high the price could eventually go, based on back-of-the-envelope math and some (probably silly) assumptions. In any case, speculating on fundamentally speculative assets is all in good fun, as long as you don’t gamble more on them than you can afford to lose. (Financial disclosure: I still own a bit of Bitcoin myself.) So enjoy this post for what it is.

The original was paywalled, so this one is subscribers-only as well.

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“Bitcoin is a bubble” is a thing a lot of people say, when they want to claim that Bitcoin is a worthless commodity whose price is sustained only by hype. But in financial economics, a bubble is just a rapid rise in the price of some financial asset followed by a rapid fall. People argue about whether these bubbles are due to speculation, herd behavior, extrapolative expectations, changing information, etc. etc. But really it’s just any time that prices soar and then plunge.

By this definition, Bitcoin has had a number of bubbles since its creation. By my count, the one that just popped is the fourth major Bitcoin bubble. So far, these have roughly coincided with the four-year Bitcoin “halving cycle”, in which the size of the reward given to Bitcoin miners gets cut in half. But that could be a coincidence. Anyway, here is a picture I made of the four major Bitcoin bubbles, with approximate return multiples added in for peak-to-peak and trough-to-peak:

Source: Author drawing lines in Microsoft Paint and then eyeballing some numbers