Andrew M. Bailey, Bradley Rettler, and Craig Warmke, fellows with the Bitcoin Policy Institute and co-authors of Resistance Money: A Philosophical Case for Bitcoin, explore whether Bitcoin is really a bubble in the following OpEd.

Despite repeated predictions of its collapse, Bitcoin is still here. Bailey, Rettler and Warmke argue that Bitcoin's price moves like ocean waves, rather than bubbles, rising and falling with human desire. This drives home the role Bitcoin plays as resistance money in an age of rising authoritarianism. 

          Guest Authors: Future of Capital Allocation

Andrew M. Bailey, Bradley Rettler, and Craig Warmke

Is Bitcoin really a bubble?

“In an age where authoritarian rule rises in fits and spurts, it should come as no surprise that bitcoin might do the same”

The bitcoin bubble hypothesis has floated around for a while. From as early as April and May 2011, when bitcoins traded hands for less than $10 apiece, pundits denounced the entire operation as froth. Two years later, bitcoin was trading between $50 and $250, prompting critics such as economist Stephanie Kelton and Alex Hern (now technology editor for The Guardian) to declare it a bubble once more. Early prognostications established a resilient pattern: declare bitcoin a bubble, no matter the price; if necessary, repeat the charge. The pattern includes Paul Krugman (2018; around $10,000), The Big Short’s Michael Burry (2021; around $50,000), and The Spectator (2024; around $65,000).

Confident obituaries number in the hundreds. But bitcoin remains, to quote The Economist, a cockroach that just won’t die. So too the bitcoin bubble hypothesis: irresistible, immortal. Could the bubbleheads be right? Could it be that bitcoin was a bubble at $10, $1,000, $10,000, and that this somehow tells against bitcoin? We’re skeptical.

Bitcoin as a bubble is an image; it can be understood in various ways. Here are three.

Perhaps an asset is in a bubble when its market price exceeds its intrinsic value, where ‘intrinsic value’ here means either cash flow (as with a dividend stock, or an interest-bearing bond) or non-exchange use (as with gold, useful when making jewelry or electronics). Soap bubbles are empty; so are prices that outstrip value. 

Bitcoin has no intrinsic value in either sense. As with physical cash, it has no yield, and can’t be used to make gadgets. Bitcoin’s market price exceeds its intrinsic value. The same is true of the ten dollar bill in your wallet; you can exchange it for something of value and yet it has no intrinsic value. Bitcoin and dollars are alike in this way, and so are both in a bubble, in this narrow sense.

Here’s where the bubbleheads go wrong. They conclude that something’s being in a bubble in this technical sense means it is doomed, or otherwise bad news. That doesn’t follow. For, like physical cash, bitcoin is useful. You can give someone cash without the permission or knowledge of any authorities; just hand it over. You can’t do this with digital dollars; their movement requires the cooperation of banks or regulated financial services. Bitcoin does away with such middlemen and thus enables global permissionless digital value transfer. It brings cash-like money to the internet. It doesn’t follow that bitcoin is overall good. The more imperious among us — and above all, the authoritarians — don’t particularly like it when other people can transfer value without their knowledge and permission. And they may be right. But in the face of such authorities and middlemen, bitcoin is a useful tool; it is resistance money. So the claim that bitcoin is in a bubble, in this narrow sense of “bubble”, says no more about it than does the observation that the dollar, itself without any intrinsic value, is in a bubble.

We might say an asset is in a bubble when its price has risen dramatically and when it is bound to crash soon. The latter part of this is a price prediction. We don’t make price predictions. But we have two observations. One, bitcoin has a sneaky way of embarrassing prognosticators. Bitcoin might pump. It might dump. It may even pump and then dump, and then precisely when you think it’ll pump again, go flat for a year. Watch out. Two, the idea of an impending dump has often proven to be short-sighted. To be sure, bitcoin lost more than 50% of its value at least seven times, each time leaving the bubbleheads in temporary triumph. But their triumph was short-lived; for on every such occasion, bitcoin has returned to previous levels or even claimed new highs. The bubbleheads were right—for a moment. Their short-term price speculations reveal what we already knew: bitcoin is volatile.

Finally, we might say an asset is in a bubble more impressionistically, when it looks and feels like various assets whose prices saw a stratospheric rise and consequent crash from which they never recovered. Think here of pets.com, the South Sea bubble, British railway mania, and so on. Put the bitcoin chart next to one of these, squint, and you’ll see some similarities.

The similarities are shallow. Unlike famous historical bubbles, bitcoin has recovered from its previous crashes. Every single time. Bitcoin is a cockroach, remember; unlike pets.com, it doesn’t die. This doesn’t mean that bitcoin will pump forever, or that it won’t crash again, or that it will inevitably recover from its next crash. But it does mean that the bubble image has been wrong. We can do better.

Goodbye, bubbles. Hello, waves. Here’s what we mean. Bitcoin’s fixed supply schedule makes it  inherently volatile. It has no central planners to adjust production in response to economic conditions. And so its price fluctuates at the bidding of a fickle master: human desire. And desire for bitcoin has come in periodic surges. Bitcoin’s price therefore moves like ocean waves, gradually rolling in — and back out, and then back again — so far, establishing higher tides. This is how bitcoin monetizes in the ebb and flow.

Will the waves continue and establish new high water marks? We have no crystal ball. But watch carefully whether critics too quickly confuse the trough of a wave for a popped bubble. Remember, too, that bitcoin is resistance money. In an age where authoritarian rule rises in fits and spurts, it should come as no surprise that bitcoin might do the same.