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The case against calling it a bitcoin bubble

A street artist performs with soap bubbles in Prague
Reuters/David W. Cerny
Still plenty of inflating to do?
By Joon Ian Wong
Published Last updated This article is more than 2 years old.

The world’s most famous cryptocurrency is trading at record highs, but is it a bubble?

Looking at a chart of bitcoin’s price as it climbed and eventually overtook its long-held, previous all-time high, set in the final months of 2013, it’s easy to see why some people think it’s a bubble in danger of popping.

But Vikram Mansharamani, who wrote a book about identifying bubbles, says the bitcoin market exhibits fewer than two of the five major features of a fully inflated bubble. He lays out his argument in a LinkedIn post, which I’ve summarized in the scorecard below.

Reflexivity: Higher prices increase demand
Leverage: Futures contracts and other instruments
Psychology: Overconfidence and “religious” conviction
Politics: Regulations and moral hazards
Maturity: Potential market remaining
Total (out of five)

Another blogger has weighed in with his own interpretation of the market using Mansharamani’s framework and concludes that trade in the cryptocurrency is a tad frothier. Whereas Mansharamani gives bitcoin half mark for “reflexivity”—the idea that an asset’s rising price increases demand for it, which investors like George Soros subscribe to—SG Kinsmann’s analysis gives bitcoin a full point for reflexivity. The argument for doing so? Transaction volumes and fees, which indicate demand, have risen along with the price.

Still, that puts bitcoin at just two out of five marks for bubble indicators.

Bubble or not, bitcoin investors are in for some price action this week. The US Securities and Exchange Commission only has five more days before it must issue a decision on a bitcoin exchange-traded fund, which could really open the floodgates of demand for bitcoin—or bring the price crashing back down.

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