Is Bitcoin a Bubble?

Design by: Ngoc Tieu My Ta

The Texas Tech University Free Market Institute on Feb. 3 hosted a lecture on Wednesday at 5:30 p.m. in MCS 100 at ASU. Bryan Cutsinger, Ph.D. introduced the lecturer, William J. Luther, assistant professor of economics at Florida Atlantic University.

Roughly 80 attendees registered for the event online and came to the event. Attendance was only open to the ASU community due to ASU’s COVID-19 restrictions. Seats were limited and sold out by Sunday. Pens, koozies and pamphlets were available for attendees as they took their seats for the lecture.

The topic of the lecture was Bitcoin. What is Bitcoin? What is the fundamental value of Bitcoin? Is Bitcoin a bubble? Luther intended to answer these three questions over the course of the approximately 35 minute talk before opening the floor to questions. Introducing the topic, Luther highlighted the volatility of Bitcoin with a graph of its price, then went on to define a bubble.

“A bubble is an asset whose price is greater than its fundamental value,” Luther said.

After clarifying some definitions, Luther went into the first question: what is Bitcoin? According to Luther’s presentation, Bitcoin is “an unbacked digital currency that enables individuals to make and receive payments over the internet, processing these transactions through a distributed clearing system.” He additionally described three ways to process transactions: decentralized, centralized and distributed.

Next, he covered two unsatisfactory reasons why some people believe Bitcoin is valuable. First, Bitcoin is costly to produce, which he said is untrue because Bitcoin is “mined,” and therefore produced when a Bitcoin transaction is made. Second, Bitcoin is valuable because of speculation, which bears the fallacy that people are speculating all the time so that it can’t create value.

The second question, what is the fundamental value of Bitcoin, Luther explains it is based on one or two things. One, Bitcoin is useful as a medium of exchange. Two, Bitcoin is expected to be useful as a medium of exchange in the future.

According to Luther’s presentation, the answer to the final question, is Bitcoin a bubble, is hard to determine because Bitcoin’s price fluctuates so frequently and this price does not allow us to directly observe the fundamental value of Bitcoin. In order for an asset to be a bubble, you have to be able to demonstrate that the price is greater than the fundamental value. Bitcoin’s price may at any given moment be higher or lower than the fundamental value.

The last topic Luther covered was the cause of Bitcoin’s fluctuation. He said these events that directly or indirectly affect the value of Bitcoin are events that make it likely that Bitcoin will be more or less useful today, or more or less likely to be used in the future. When one of these events occurs, even if it only affects a small portion of Bitcoin holders, their change in demand for Bitcoin causes their trading partners to also have a changed demand for Bitcoin. This effect cascades and creates a network effect causing the price of Bitcoin to increase or decrease depending on the event in question. The main reason Luther cited for Bitcoin’s incredibly dramatic value fluctuation, was that Bitcoin is not a currency that’s backed by any government to reassure its value.

Luther then opened the floor for questions from the audience. An attendee asked about why Luther was speaking on the topic, from which he cited his over 8 years of researching and publishing on the topic. Other attendees asked about his own willingness to invest in Bitcoin, anonymity in Bitcoin transactions and about 15 more questions before the event concluded.

The next Free Market Institute lecture will be held on Tuesday, March 23 at Texas Tech University at 6 p.m. and will feature Donald P. Kennedy giving a lecture titled “The Property Species: Mine, Yours, and the Human Mind.”