Understanding Bitcoin as a Speculative Asset

Historical Perspectives

The paper “Understanding Bitcoin as a Speculative Asset” was published in April 2015. http://econ.columbia.edu/wp-content/uploads/sites/41/2018/03/guha.pdf

Following is a broader report on this topic has 62 references listed in the footnotes at the bottom of this page.

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Writing in Forbes that value of the cryptocurrency increased 140% in 2016 and 49% in the past month, Dorfman maintains the swings in either an upward or downward direction do not make bitcoin a plausible currency as much as a speculative asset. [1] Looking forward, whether cryptocurrencies such as Bitcoin are deemed a speculative asset or currency, the fact remains that it has yet to reach mainstream adoption, and popular currencies such as Ethereum do not have the scalability to handle the use cases they are capable of handling. [2] The Bitcoin maybe perceived as a speculative asset due to it bearing similarities to previous speculative bubbles and one example that simply won’t go away is the “tulip speculative bubble” when the prices of tulips soared due to them being speculated to be worth a lot more than they actually were. [3] Bitcoin is a Speculative Asset, Not a Currency, Says Economics Professor You are using an outdated browser. [1] It is a highly speculative asset and the Fed doesn’t really play any role, any regulatory role with respect to bitcoin other than assuring that banking organizations that we do supervise are attentive that they’re appropriately managing any interactions they have with participants in that market, and appropriately monitoring anti-money laundering Bank Secrecy Act responsibilities that they have.” [4] Federal Reserve chair Janet Yellen called bitcoin a “highly speculative asset” that isn’t subject to regulation by the U.S. central bank during her final press conference today. [4]Federal Reserve Chair Janet Yellen called the digital currency bitcoin a “highly speculative asset” that “doesn’t constitute legal tender.” [5] Bitcoin – A Speculative Asset with “No Intrinsic Value”, Says Business Insider Founder You are using an outdated browser. [6] Many of the latest to join the movement have done so simply to make a profit off of Bitcoin as a speculative asset. [2] The most recent person to do was the FED Chair person Janet Yellen who called the Bitcoin a “speculative asset” and thus stating that “Bitcoin at this time plays a very small role in the payment system”, a statement most Bitcoin investors would agree with. [3] 

This article will explain why bitcoin is a speculative risk asset, and not a true investment.[7] 

Understanding Bitcoin as a Speculative Asset Rishab Guha Advisor: Professor José Scheinkman April 20, 2015 Abstract e recent price history of Bitcoin can be characterized as a speculative bubble. [8] In this paper, I show that the rapid increase and equally-rapid collapse in Bitcoin’s price, valuation, and trade volume can be explained by regarding Bitcoin as a speculative asset. [8] Yermack concludes that Bitcoin is more of a speculative asset than a currency, and quotes the CEO of Coinbase, the largest Bitcoin wallet service in the world, 5 as estimating that in 2014 about 80 percent of Bitcoin trade volume was speculative, down from 95 percent a year earlier. [8] All previous economic analyses of Bitcoin have tried to understand it from the perspec- tive ofmonetary economics, and concluded that it behavesmore like a speculative asset than a bona fide currency. [8] 

Others argue that due to slow transaction speeds, wildly fluctuating valuations, and lack of real world adoption, point to it simply being a speculative asset that could explode in price, or crash at any moment. [2] A speculative asset, also known as a “bubble”, is an asset that experiences a dramatic spike in value within a particular industry, commodity, or asset class. [2] 

While the amount of illegal activity taking place on the Bitcoin network appears to be relatively large, the paper indicates that the prevalence of this sort of activity has been declining since 2015 as more mainstream users have entered the market due to the interest in bitcoin as a store of value or speculative asset. [9] “Differences in transactional characteristics are generally consistent with the notion that while illegal users predominantly (or solely) use bitcoin as a payment system to facilitate trade in illegal goods/services, some legal users treat bitcoin as an investment or speculative asset. [9] 

With bitcoin supply constrained and increasingly falling short of demand, instead of functioning as a currency, bitcoin is a speculative empty asset.[10]

The rapid appreciation in value indicates that bitcoin has become a speculative asset, subject to highly volatile and unpredictable price swings.[11] Although bitcoin has been the talk of the financial services sector this year, Yellen downplayed its role in the real economy, calling it a ” highly speculative asset ” that does not even function well as a store of value. [12] If this happens, Bitcoin could very well become the equivalent of Tulip Bulbs, a speculative asset that saw its prices soar in the sixteen hundreds in Holland, before collapsing in the aftermath. [13] When I employ that strategy it pushes me to work on building my total available assets so I can expose more dollars to the speculative asset class and participate in the proliferation of the bitcoin rally. [14] 

Unfortunately, as demonstrated by it’s recent price volatility, people are treating it as an extremely speculative asset. [15] My results show that the study of speculative assets should expand its consideration of dynamics affecting the size and composition of an asset’s investor base over time. [8] In what is likely to be her last press conference at the central bank, Yellen described the high-flying cryptocurrency as a “highly speculative asset” that “plays a very small role in the payments system” and is “not a stable store of value.” [16] The fundamental for one asset is based on its ability to purchase even more lacking in fundamentals and totally speculative assets one must own it. [17] 

Conclusion The phenomenon of Bitcoin provides a good example for teaching about asset value, fundamental value and speculative bubbles. [18]With Bitcoin supply constrained and increasingly falling short of demand, instead of functioning as a currency, Bitcoin is a speculative empty asset. [19] 

M a r c h / A p r i l 2 0 1 8 79 Social Education 82(2), pp. 79-82 ©2018 National Council for the Social Studies Understanding Bitcoin: Money, Asset, or Bubble? J.R. Clark, M. Scott Niederjohn, and William C. Wood The cryptocurrency Bitcoin has been prominently featured in the news recently. [18]

Bitcoin’s dramatic price reversal since the start of the year tells an important story: it means speculative money is flowing out of the asset class for the first time since the bull market re-emerged in early 2017. [20] Without short selling, the current price of a speculative asset is the expected maximum valuation that will ever be given it by the non-forward looking. [21] The whole thing is available here ; this post will focus on the link I uncovered between news coverage, investor inflow, and speculative bubbles which continues to apply to cryptocurrencies, and speculative assets more broadly. [22] 

Wozniak was upset that Bitcoin didn’t turn out to be that universal currency he could use while traveling around the world, and instead became a speculative asset that gave him angst every time its price took a turn for better or worse. [23] Fed Chair Janet Yellen called bitcoin a “highly speculative asset”; JPMorgan Chase CEO Jamie Dimon said it was a “fraud” although he has since softened his stance; billionaire Warren Buffett called it a “mirage,” while Vanguard founder Jack Bogle told investors to “avoid bitcoin like the plague.” [24] 

Bitcoin is one of those assets that does not quite fit well into any definition and a historical understanding of what is a currency and what is a commodity sheds light on the argument. [25]

PS. This reddit thread by people who lost money when the MtGox exchange shut down shows how Bitcoin has become a speculative asset bubble similar to the dot com bubble or any stock market bubble. [26] Digital currencies hold great promise, and investors may be drawn to drawn to bitcoin as a speculative asset that could potentially deliver some very promising returns. [27] Given this knowledge, we consider Bitcoin more of a speculative asset than a real currency. [28] Cryptocurrencies have generated a considerable amount of controversy: Regulators are ramping up scrutiny, and many believe that these highly speculative assets — particularly bitcoin — are fueling a bubble. [29] She said bitcoin ” is a highly speculative asset” that “at this time plays a very small role in the payment system.” [30] This limited supply was supposed to be a clever design feature, but actually it’s turned Bitcoin into a speculative asset. [26] Bitcoin remains a speculative asset, in part because it lacks utility. [31] 

“While the use of cryptocurrencies as speculative assets should promote diversification, their adoption as payment method (i.e., the conventional use of a shared medium of payment) should incentivize a winner-take-all regime,” say Bickell and co. [32] As long as this incentive doesn’t exist, there won’t be any incentive for cryptocurrencies to be viewed as more than speculative assets in the near future. [23]Cryptocurrencies are “highly speculative assets,” Catalini added. [24] 

“It looks less like a currency every day because the price is just skyrocketing like a speculative asset,” he told Business Insider. [30] The more you use the currency to buy goods and services from the real economy, the more you would get rewarded with a portion of any newly created currency, whereas those who sit on their coins and use them as a speculative asset would get no share of the newly created money. [26] The benefit goes to those who sit on the currency (which prevents it functioning as a currency and makes it a speculative asset). [26] We believe that the basic requirements for currencies and speculative assets are mutually exclusive. [33] 



Who wants to part with (or accept in exchange) a currency that can rise or fall by 20% in an hour? And true currencies are used to denominate liabilities as well as assets; imagine the ruin faced by those who had taken out a bitcoin mortgage or business loan earlier this year. 
Since the beginning of this year, the price of bitcoin has increased by 1300% as more and more consumers flock to it hoping to profit off its increasing popularity and the associated increase in value. [35] Bitcoin, the cryptocurrency, has surged about 17 times in value this year, prompting caution from central bankers around the world. [36] 

In September 2017, the Chinese government outlawed bitcoin exchanges in mainland China, sending the price of bitcoin tumbling. [35] With the price of a bitcoin reaching record highs of more than $10,000, more and more ordinary people consider investing in the cryptocurrency. [35] 

Bitcoin, like other assets like gold, doesn’t yield income. [35] The first, and most significant risk is that compared to any currency, share, or gold, bitcoin is extremely volatile. [35] 

If at any point the Chinese government should decide to make Bitcoin mining illegal the price is likely to plunge into oblivion. [35] Bitcoin brings no cashflows to the owner; the only return will come via a rise in price. [34] 

She added that bitcoin is “not a stable store of value. [36] Stores of value are supposed to keep their value; bitcoin, by contrast, is extremely volatile. [34] The more immediate fears about bitcoin centre on the recent dramatic rise in its value. [35] 

If the bitcoin boom looks like a mania, calls for it to be banned are also over the top. Regulators are right to watch “initial coin offerings”–attempts by companies to raise money by issuing digital tokens of their own. [34] Bitcoin might triumph if currencies like the dollar and the euro succumb to hyperinflation, but there is no sign of that. [34] 

Most recently Jamie Dimon, CEO of JPMorgan, one of the world’s largest investment banks declared that he would fire any employee trading bitcoin for being stupid. [35] In a recent article, the Financial Times called bitcoin itself a pyramid scheme, much to the dismay of crypto enthusiasts. ( A pyramid scheme is usually an illegal operation in which participants pay to join and profit mainly from payments made by subsequent participants. [35] As the Financial Times explains, bitcoin is a string of computer codes which means that new bitcons can be created – up to an agreed limit – by computers that gain the right to do so by solving complex puzzles. [35] 

There’s nervousness in the market that a flash crash might be imminent after the cryptocurrency tumble by more than $1,300 in minutes on the bitcoin exchange Bitfinex. [35] If so, bitcoin would become a vehicle for other services, and people would need to own some, or a fraction of one, to use them. [34] Despite the claim that bitcoin is a “global currency”, the reality is that 58% of all bitcoin mining happens in China. [35] Federal Reserve Chair Janet Yellen called the digital currency bitcoin a “highly speculative asset” that “doesn’t constitute legal tender. [36] Might bitcoin replace ordinary currencies in everyday transactions? Not soon. [34] For those who believe that cryptocurrencies could be the next big thing, buying bitcoin is like an option contract: it might just pay off. [34] The original appeal of bitcoin was to the libertarian fringe and those who wanted to trade illegal commodities, like drugs, out of sight of the authorities. [34] The volatility of bitcoin to U.S. dollar is almost six times the volatility of the Rand to U.S. dollar. [35] Investors have had a lot of fun piling into bitcoin; the real test will come when they suddenly need to get out again. [34]More and more private investors have been flocking to bitcoin “exchanges’ that have sprung up all over the internet and that are aggressively advertised on social media. [35] 

Its code ensures that no more than 21m coins can ever be created; that sets bitcoin apart from fiat money, which central banks can create at will.[34] Social media is alive with stories about friends of neighbours or distant cousins who have made a lot of money through bitcoin. [35] 

There is no doubt that Bitcoin – and in particular blockchain, the technology behind it – has the potential to revolutionise the financial services industry. [35] No matter how useful the underlying blockchain technology is, or how widely it can be applied, there are real and substantial risks involved in bitcoin. [35] Part of the nervousness about bitcoin is that, along with other cyptocurrencies, it challenges the traditional role of banks and central banks. [35] 

Real economic damage occurs when a plunge in asset prices is combined with the widespread use of money that has been borrowed, particularly by banks. [34] They are right, too, to warn retail investors about the dangers of a thinly traded market for an asset with no inherent value and scant recourse if things go wrong. [34] When there is no obvious way of valuing an asset, it is hard to say that one target price is less likely than another.[34] An equity is a claim on the assets and the profits of a firm; a bond entitles the investor to a series of interest payments and repayment on maturity. [34] Only investors with a healthy appetite for risk are willing to invest in risky, volatile assets. [35] Investors with a lower risk appetite, such as asset managers or pension funds, prefer assets with a somewhat lower return, but which are less volatile. [35] The rule of thumb is that the sophistication of an investor increases with the volatility of the asset she invests in. [35] When professional investors decide on which assets to hold, they look at both the return and the volatility of the asset. [35] 

This paper analyses the question of whether Bitcoin is a medium of exchange or an asset and more specifically, what is its current usage and what usage will prevail in the future given its characteristics. [37] The analysis of transaction data of Bitcoin accounts shows that Bitcoins are mainly used as a speculative investment and not as an alternative currency and medium of exchange. [37] Bitcoin does not make a good currency for two key reasons: its unstable value and its slow transaction time. [1] The value of Bitcoin is derived purely from trust and speculation–as with any other fiat currency that one might trade on Forex. [38] Bitcoin isn’t a currency, and hasn’t been one since 2014 when the Internal Revenue Service deemed Bitcoin to be an asset rather than a currency with Notice 2014-21. [38] As bitcoin captures the world’s attention while soaring to unprecedented heights, the cryptocurrency has been labelled as an asset primed for a bubble, with no intrinsic value. [6] Where bitcoin differs from other assets is that it does not have an underlying use. [1] Such an argument is backed up by Bitcoin’s extreme volatility in the markets which is partially due to the Bitcoin not being backed up by a physical asset such as gold or the property market. [3] 

This argument is flawed because Bitcoin doesn’t actually store any value, ie. you can’t withdraw the energy used to produce Bitcoins (as you could with oil), nor do Bitcoins themselves have any practical application (like gold). [38] However the Bitcoin through its life cycle has evolved, going from a niche currency to now a more mainstream currency and a digital gold and its hopes for the future is to become a tradeable digital gold with its place firmly in financial system. [3] Japan and much of Asia are planning to adopt cryptocurrencies and even Nations such as Iran are planning on using the Bitcoin directly into their digital financial infrastructure, when taking into account all these factors the price of the Bitcoin is actually still extremely cheap. [3] 

Just like fiat currencies, coins like Bitcoin can be exchanged between digital wallets instantly in exchange for goods or services. [2] Bitcoin bills itself as a true digital currency, a medium of exchange with which people from around the world can buy and sell things–without the pesky, and sometimes expensive, mediation of banks. [38] This brings us to the question of volatility: Bitcoin is volatile because people are now buying it with the expectation that it will continue to increase in value. [38] Bitcoin is a hybrid currency: it’s not quite fiat (because it has a limited supply), but it’s not real either (because it has no inherent value). [38] Some have argued that Bitcoin does have an inherent value because it embodies the energy it took to “mine” the currency. [38] Bitcoin, by contrast, is used to hide wealth, conceal illegal transactions and to trade in order to gain or lose value. [1] He said he has no problem with people using bitcoin for these reasons, but people should stop expecting it to be a currency for everyday transactions. [1] Calling Bitcoin a real currency, like gold, is a misleading. [38] The entire point of buying the Bitcoin now is for investment purposes due to the Bitcoin’s price being extremely low even though it stands at roughly $16,000. [3] I find that there is substantial evidence against the hypothesis that the large price movements experienced by Bitcoin were due to changing expectations about fundamentals. [39] e recent price history of Bitcoin can be characterized as a speculative bubble. [39] Rather than understand what Bitcoin and other cryptocurrencies are and what they offer, the recent price spike over $10,000 has rattled some observers, and made them feel the best course of action is to hop on board. [2] 

Bitcoin is a decentralized alternative that would allow users to store value and not have to deal with the central banks or the IRS, and that in itself is a great gift for humanity. [7] The value of cryptocurrency continues to climb, and Bitcoin has even reached over $13,000 at the end of 2017. [2]What if you pay your employee 10 bitcoin a year? The value of bitcoin might tank, and now your employee is underpaid, and quits the job. [7]Reuters reports that Bitcoin lost over 20 percent of its value within the last 24 hours, sliding from Wednesday’s high of $11,395 down to a low of $9,000 in volatile trading on Thursday. [38] Bitcoin, on the other hand, cannot be used for anything–it only has value because we ascribe it value.[38] The massive value Bitcoin has been able to achieve has captured the imagination of the public, as is evident by the thousands that have flocked to the space in the last quarter of 2017, most of whom have no technical background or clue how the technology works. [2] The value of bitcoin changed an average 2% over the last month, Dorfman noted. [1] What if you decide to pay 2 bitcoin for a car, and the bitcoin doubles in value that day due to speculation? That would mean you overpaid for the car. [7] 

Bitcoin having been the first crypto currency, it reasonable to expect that crypto currencies will evolve and become more effective. [7] At the time this article was written, there are over 1,300 crypto currencies like bitcoin in circulation. [7] Bitcoin does play a small role “at this time” which is the entire point of buying it now when it’s still a bargain as opposed to when it is fully adopted and worth potentially a few hundred thousand dollars, something that is completely achievable given Bitcoin’s rapid success and its ability not to just meet investor and analysts goals but go beyond them. [3] Furthermore what makes the Bitcoin so precious is the same reason why diamond and gold are precious despite their little practical use, there is a limited supply of them, just like the Bitcoin. [3] Essentially, Bitcoin works like digital gold: it can be used to settle debts, and it has a finite limit. [38] Bitcoin is defined as digital money within a decentralized peer-to-peer payment network. [37] e digital traces of bubbles: feedback cycles between socio-economic signals in the Bitcoin economy. [39] 

Although block chain technology will cut investment costs, improve supply chains, and offer security from criminals, bitcoin has some of the same problems that fiat currency has. [7] If no one accepted Bitcoins as a medium of exchange, or bought them as an investment, then Bitcoin would be literally worthless. [38] The volatility of bitcoin makes it impossible to be used as a long term medium of exchange. [7] Block chain technology is good for man kind, but bitcoin may not be the final medium of exchange using block chain technology. [7] 

A CNBC host bought up Bitcoin’s applicability in countries like Venezueala, where new bitcoin miners have imported groceries from Amazon Pantry in the United States by paying with the cryptocurrency. [6] Just like the U.S. dollar, bitcoin is not backed by anything of intrinsic value. [7] 

“Bitcoin at this time plays a very small role in the payment system,” Yellen said Wednesday during a press conference in Washington, appearing to downplay it’s ability to affect wider financial markets. [5] If Bitcoin rose this year by more than a 1000% despite it not being vastly adopted by the financial systems, one can only speculate as to how much the Bitcoin will be worth once it is fully adopted within the financial systems. [3] 

Bitcoin (in the U.S. at least) cannot function as a currency. [38] If Bitcoin and Ethereum are to ever reach mainstream adoption, they would need to implement scaling protocols that will allow for their systems to handle the massive amount of transactions that fiat currencies handle everyday. [2]Officially, even the biggest cryptocurrencies such as Ethereum and Bitcoin are not official currencies. [2] 

Every time a Bitcoin changes hands a capital gains disposition is triggered for U.S. tax purposes–the same thing happens whenever someone sells a stock or a house. [38] In understanding why Bitcoin’s so volatile, we must first understand exactly what Bitcoin is. [38] However the Bitcoin certainly isn’t a tulip and unlike a tulip, its supply does not outstrip its demand due to their only being a limited amount of Bitcoins in circulation, again making its properties more similar to gold. [3] Bitcoin differs from gold in one key respect: it has no intrinsic value. [38] 

Thus making a strong case and debunking the myth of the “Bitcoin bubble”, with such myths having been around ever since its birth. [3] For this reason, Bitcoin will only grow more volatile over time–once the penny-flippers find something they like, they will bleed it dry. [38] As for transactions, bitcoin is slow due to the process of protecting the security of its blockchain. [1] There are restrictions on how many bitcoin transactions can be completed in a day. [1] Changing the rules for processing BTC transactions has met resistance in the bitcoin community from those who wish to preserve its traceability and anonymity. [1] 

Therefore, the only thing that makes bitcoin valuable is what people are willing to pay for it. [7] People have bought houses, boats, and other things with bitcoin. [7] 

Yellen went on to answer a follow-up question on directives for banks regarding bitcoin. [4] Bitcoin was invented in 2009 in response to the 2008 financial crisis. [7] To conclude it appears both Bitcoin critics and Bitcoin enthusiasts agree on one thing, the Bitcoin is currently an investment and when looking at history, it is one spectacular investment that is propelling itself to going mainstream. [3] Such an opinion is shared by one of PayPals’ board of directors Wences Casares who stated the Bitcoin will hit $1,000,000 within the next 5 to 10 years. [3] Her comments didn’t represent much of a departure from past statements – she told Congress in 2014 that the Fed wouldn’t move to regulate bitcoin activity, while also calling blockchain an “important technology” earlier this year. [4] 

Because bitcoin is so volatile, it cannot be used as a form of long term payment. [7] If Bitcoin and Ethereum are going to help third-world countries into the modern age as they aspire to do, they must overcome the scaling issues and first achieve mainstream recognition and enterprise scalability. [2] New York Fed President William Dudley said last month he would be “pretty skeptical” of bitcoin, adding that it is “not a stable store of value.” [5] 

” Reserve Bank of Australia Governor Philip Lowe said this month that the fascination with cryptocurrencies “feels more like speculative mania than it has to do with their use” as a form of payment. [36] I argue that the Bitcoin price bubble was inflated by investors who were more focused on reselling their holdings to a “greater fool” than on the fundamental value of Bitcoin as a potential currency. [8] e authors also identify several unique risks borne by users of Bitcoin, including the market risk that a user’s holdings rapidly lose value due to Bitcoin’s extreme price volatility, the legal risk that governments decide to outlaw the use of Bitcoin, the technical risk that a user’s Bitcoin wallet is hacked, and the counter-party risk that the exchange or wallet service holding a user’s Bitcoins becomes insolvent. [8] Participants exchange a legal tender dollar or some other real asset, for example, for a share of the limited supply of bitcoins at whatever the current price may be at the time. [40] is implies that exchange-rate expectations of Bitcoin are not driven by the same fundamental factors as the exchange-rate expectations of other currencies, or even the price expectations of assets such as gold, which behave like currencies. [8] Because Bitcoin aspires to be a major currency, one way to evaluate its asset value is through comparison with major conventional currencies. [8] As an asset, Bitcoin is economically interesting because of its explosive price growth: as Figure 1 shows, from the start of 2011 to the end of 2013, the price of a single Bitcoin increased by over 400,000 per- cent, from less than $0.30 cents to over $1,100, before decreasing to less than $250 at the time of this writing. [8] I argue that this dynamic can explain the recent price history of Bitcoin, and is generally applicable to assets which experience large increases in public interest over time. [8] An illustrative example: eGoodWife Unfortunately, due to endogeneity concerns, it is very difficult to directly test the hypothesis that price bubbles in Bitcoins are caused by optimistic speculators overestimating the num- ber of new traders becoming aware of the asset. [8] Newey-West HAC standard errors are in parentheses. 37 Dependent variable: # of BTC Traded # of New Traders (1) (2) Bitcoin Price 672.53∗∗∗ 1.90∗∗∗ (128.51) (0.19) Constant 44, 519.39∗∗∗ 27.12∗∗∗ (4, 447.11) (5.97) Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01 Table 14: Regression showing a significant relationship between Bitcon price and measures of both trade volume and the change in per-capita asset supply. [8] In this section, I use a novel dataset to show that investors who had not previously purchased Bitcoins were more likely to do so for the first time on days in which Bitcoin was the subject of news coverage, even aer controlling for changes in expectations about Bitcoin’s fundamental value. [8] ese regressions show that even aer controlling for changes in expectations about the “fundamental” price of Bitcoin, the mere existence of news articles covering Bitcoin caused a meaningful increase in the number of investors buying in for the first time. [8] 

is suggests that most agents involved in the Bitcoin market during its price bubble were probably not “fundamental” investors, as they were not reacting to changes in factors that would affect future fundamental demand. [8] is shows that there is a substantial disagree- ment among investors, not merely about the expected future price of Bitcoin, but also about the security of the very exchanges on which Bitcoin is traded, and that this heterogeneity in beliefs creates a situation in which the expected cost of shorting Bitcoin is too high for pessimists to bear. [8] When combined with attention-driven inflow short-sales constraints can generate a speculative price bubble, in which speculators try to buy up Bitcoin in advance of news coverage but overshoot, leading to inflated prices followed by a correction. [8] VI Speculative Anticipation and Price Bubbles In general, the attention-driven buying observed in section IV should lead to a gradual in- crease in the price of Bitcoin: as the number of agents interested in Bitcoin increases, per- capita supply will decrease,5 so equilibrium price should be pushed up. [8] 

Gox online exchange started service, the total value of Bitcoins exchanged across the network was less than $6,000 per day,2 and the market price was less than $0.10 per coin. [8] The Chicago Mercantile Exchange (CME) is introducing bitcoin derivatives – a form of bet on the future value of the currency – which will let hedge funds into the market before Christmas. [41] He calculates that the BTC/USD exchange rate is over 40 times more volatile than the EUR/USD exchange rate and even more volatile when compared to the U.S. CPI. is means that consumers holding Bitcoin face significantly more uncertainty about the future value of their currency than they would holding dollars or Euros. [8] As bitcoin hits the stratosphere, there are fears an economic bubble is forming as it becomes treated less like a currency and more like a store of value, open for speculators making ever increasing bets on how far it can rise. [41] When we accuse banks of manufacturing their own commodity out of thin air every time they make a loan it isn’t nearly as absurd as using Bitcoin as a store of value because with a bank loan there is a contract to honor the debt a contract is not a bubble; there is really some there there. [17] Bitcoin fails miserably as a store of value and as a medium of exchange (and it’s not accepted to pay taxes) Few people use it for that purpose. [40] Bitcoin backers view it as a currency and payment system of the future, as well as a new asset class that people can invest in. [42] Bitcoin is the fastest-growing asset in the world this year, but the virtual currency does not appear to have many users in London’s tech district. [41] Bitcoin thus falls squarely within the range of assets for which price discovery is meaningfully hampered by high costs of shorting. [8] Bitfinex, which also hosts one of the largest conventional Bitcoin exchanges in the world, lets traders lend Bitcoins in their trading account to those who wish to short the asset in exchange for a daily interest rate (Figure 9), which has averaged an value-weighted average annualized rate of 14 percent since June of 2013.3 By comparison, D’Avolio (2002) re- 3. [8] e counterparty risk is height- ened by the lack of legal recourse: there have been no audits of Bitfinex, or any other Bitcoin exchange, by certified accountants, and there is no legal precedent of traders being able to recover lost assets aer an exchange failure. [8] Hunter Horsley, co-founder of Bitwise Asset Management, which created an index fund that will invest in the 10 biggest cryptocurrencies, including Bitcoin, says investing in digital currencies is still in its infancy and poses risks. [42] This requires energy and, as long as the cost of energy is cheaper than the value of a mined coin, bitcoin will continue to be a sought after asset. [17] Bitcoin is the first, and the biggest, “cryptocurrency” – a decentralised tradeable digital asset. [41] Oliver White at Fathom Financial Consulting wrote that bitcoin “certainly fits the criterion” for a bubble asset. [41] 

They found the current value of bitcoin running at six times its average price since 2013. [41] The rising price of bitcoin does not result in an increase in value, but it does allow superior players in this global game of musical chairs to extract value from inferior players. [40] Some of these wallet services also process and exchange Bitcoins for retailers, handling the business of converting Bitcoins to dollars themselves so that business can accept Bitcoins as payment without being exposed to fluctuations in price. [8] In addition to paying high borrowing costs, traders whowish to short Bitcoin on Bitfinex must shoulder substantial exchange risk–I show that this implicit exchange risk actually out- weighs the already-high explicit price of shorting. [8] 

As Table 1 shows, a positive correlation does appear between the dollar exchange rates of major conventional currencies, as well as the dollar price of gold, but does not extend to Bitcoin. [8] e dollar price of a Bitcoin can be thought of as a BTC/USD exchange rate; if Bitcoin is priced according to currency-market fundamentals, this exchange rate should show some relationship other dollar exchange rates. [8] ese results suggest that agents involved in trading Bitcoin for dollars do not strongly consider changes in fundamentals affecting the prospects of the dollar when setting price expectations. [8] Showing this relationship empirically will require clean identification of a relationship between price increases and news coverage–in the case of Bitcoin, changes in both news coverage and price are oen the result of new information which changes investor expectations of price fundamentals. [8] Under this framework, the Bitcoin price should reflect investor expectations that large amounts of commerce currently transacted in dollars will eventu- ally transition to being transacted in Bitcoin. [8] Billionaire investor Warren Buffett has warned numerous times that it is a dangerous investment, saying “you can’t value Bitcoin because it’s not a value-producing asset.” [42] Even Bitcoin afficienados are judging the value of their Bitcoin holding by the amount of government backed fiat money that they can exchange for it.[40] The best indicator that bitcoin has value is the increasing chatter and nervousness from governments as they realize their monopoly on money is being threatened. [40] Skeptics say Bitcoin is impossible to value, wildly volatile and a speculative play that may never gain widespread acceptance from governments and central banks. [42] Yellen also called Bitcoin “highly speculative”, “not a stable store of value” and opined that it doesn’t constitute legal tender. [43] By calling tokens a nouveau currency, the proponents of bitcoin have managed to turn a pretty common form of financial swindle into a trendy method of speculative endeavor that people talk about at holiday cocktail parties. [40] VII Conclusion is paper argues that massive price movements experienced by Bitcoin between 2011 and 2013 were the result of speculative activity. [8] 

Interest in Bitcoin and Silk Road exploded in mid-2011 following a handful of articles in the popular media describing Silk Road as “the underground website where you can buy almost anything,” andBitcoin as the “wampum” of the Internet. (Chen 2011)is increase in media attention to, and public interest in, Bitcoin corresponded to a similarly-large increase in both price and trading activity. [8] Following the price increase and collapse of mid-2011, trading activity in Bitcoin set- tled into periods of relative calm, punctuated by occasional short-lived price spikes, each of which were usually accompanied by increases in the amount attention paid to Bitcoin. [8] 

The technology behind Bitcoin will be useful, but the price is the crypto currency scam. [40] Bitcoin will never be a currency as the transaction times are too slow. 10 minutes to confirm a transaction will never work at a gas station or coffee shop. However, I believe it will become Digital Gold and serve the same function. [17] When they arrive in a safe place, they open a bank account in that currency, and exchange the bitcoin for local currency. [17] The participants exchange something for nothing – namely bitcoin, which have no intrinsic value or yield, but which trade over the world of ethernet, outside of the regulated world of banks and financial payments. [40] ere is a long history of Bitcoin exchanges failing without warning, especially during mar- ket downturns–Moore and Christin (2012) find that 46 percent of all Bitcoin exchanges have collapsed–so there is no guarantee that pessimistic traders would be able to collect their gains in the event of a collapse in the price of Bitcoin. [8] It has some major disadvantages: enormous price fluctuations relative to other currencies, in part due to stupendous holdings by a few groups, and a distinct lack of mainstream use (the number of retailers that accept bitcoin is <1000). [40] There may be another way that bitcoin has a fundamental not tied to its extremely low use value. [17] It may be that bitcoin has a fundamental value above zero, if wildly fluctuating and hard to estimate, far beyond the econometric difficulties identified by people such as Hamilton, much less Flood and Garber. [17] Trade variations in Bitcoin cannot be explained by changes in expectations regarding Bitcoin’s fundamental strength as a currency ormoney- transfer platform. [8] Does that make any sense for a currency that is supposed to be durable store of wealth? How can one possibly make investments, and calculate rates of return on capital projects funded with Bitcoin, and paid for by future cash flows in Bitcoin? We would have to rethink entirely our expectations for how these things work. [40] Fixing the store of value issue in the future won’t save bitcoin or most of the current crop of crypto-currencies though. [17] Unlike Gold, Bitcoin has not been around very long, nor does it have government backing (gold has had this through most of history) to bring stability to its value. [17] The real money in Bitcoin is in the rakeoff of fees by exchangers like the exchange company who sponsored the St. Petersburg Bitcoin college football bowl game a few years ago. [40] Bitcoin and other cryptocurrencies do have an excellent chance of becoming the new norm in terms of the everyday money we use because they operate like both “digital cash” and “digital gold.” [15] Bitcoin – created by “miners” who use high-powered computers to solve complex mathematical problems – must be stored online using a digital wallet, and can be bought or sold using exchanges such as Bitstamp, Bithumb and Kraken. [41] e trading data I use for my analysis is manually aggregated on the trade-by-trade level from the public trade logs of the four largest Bitcoin exchanges: Mt. [8] is represented the first of many attention-fueled spikes in Bitcoin price and trading activity. [8] Without the meaningful ability to sell short, pessimists who believe that Bitcoin is overvalued are forced to exit themarket, harming price discovery, and possibly leading to a price bubble. [8] One testable implication of thismodel is that size of the price bubble should be increasing in the volume of Bitcoin traded. [8] e number of Bitcoins 24 tradedper day corresponds to daily turnover rate, themeasure suggested by Scheinkman and Xiong (2003) as well as Xiong (2011) for measuring the relationship between volume and price.7 As Table 14 shows, I find a statistically-significant positive relationship between price and volume of Bitcoins traded. [8] As Figure 23 shows, the price of Bitcoin steadily increased during this period, peaking just before the episode’s air date, and descending immediately aerwards. [8] 

Most people who are buying Bitcoin are buying it because they think they can sell it to someone at a higher price. [15] Though there is clearly demand for a platform that would allow pessimists to enter the market and bet against the price of Bitcoin, the Bitcoin community’s love of anonymity and distrust of financial regulation have historically created prohibitively high costs. [8] Once Bitcoin had attracted retail investors’ attention, they started to form price expectations, and some chose to buy in. [8] I find that there is substantial evidence against the hypothesis that the large price movements experi- enced by Bitcoin were due to changing expectations about fundamentals. [8] As the crowd pursuing the bitcoin opportunity grows, and the price measured in dollars or euros or yen rises, the ability of responsible observers to convince true believers that they are participating in a vast pretense diminishes. [40] Close analysis of trade activity surrounding a single major anticipated attention shock, and regression results establishing general relationship between Bitcoin price and trade volume, provide empirical support for this hypothesis. [8] The cryptocurrency is steadily becoming more mainstream now that bitcoin futures trade on a regulated exchange. [16] Agents who hold Bitcoins and wish to lend them to short-sellers in exchange for an in- terest rate face the exact same situation: they receive payment in exchange for assuming the risk of an exchange collapse. [8] The restaurant is not exposed to a bitcoin bubble because customers pay via an app that takes on the risk by instantly converting bitcoin payments into pounds on behalf of the shop. But he likes the lower cost it brings to processing sales, unlike the “crazy fees” charged by credit card companies. [41] If it’s a bitcoin bubble there is nothing there but spent electrons and it will be a very pointless, frenzy of a bubble which will never control its own value. [17] No one ensures your right to use bitcoin or works to keep its value stable. [44] More than anything else, the bitcoin enthusiasts are attracted by the fact that the value of these tokens, measured in real currencies, has been rising steadily, up for than 1,600 percent in 2018 alone. [40] In this case Bitcoin, which includes instanta- neous transmission of value as part of its protocol, should takemarket-share fromcompanies which currently specialize in expediting online transfers of dollars. [8] Gold and the major reserve currencies all share exposure to the dollar factor, but Bitcoin does not. numbers of these investors, each planning to resell their holdings to a “greater fool.” [8] By summing the number of users whose first trade occurred on each date, I can therefore arrive at an estimate of the number of investors buying Bitcoin for the first time on that date. [8] I also use a novel dataset to show that news coverage of Bitcoin induced individuals who had not previously traded Bitcoin to invest for the first time. [8] 

How might bitcoin have a fundamental? One reason might be for its use as a medium of exchange. [17] Bitcoin can only be used as a medium of exchange and in practice has been far more important for the dark economy than it has for most legitimate uses. [41] 

The whole point of Bitcoin is to be a decentralized currency that is NOT influenced by outside centralized forces (like governments and central banks). [15] The more serious objection to bitcoin is that it enables criminals and terrorist organizations to move value around the world out of sight of national governments and law enforcement. [40] The reason for the steady increase in the value of bitcoin is pretty simple: a shrinking float. [40] With a limited number of bitcoins available to trade and a growing crowd of speculators entering the deliberately inefficient market, the only direction the “value” of bitcoin can go is upat least until it doesn’t. [40] In the context of trade conducted on exchanges, Bitcoin is oen abbreviated BTC. Because there is no centralized Bitcoin authority there has been a proliferation of ex- changes competing with each other for business. [8] In the early years of Bitcoin the trading ecosystem was dominated by a single exchange, Mt. [8] Gox’s relationship to other exchanges but not the broader Bitcoin ecosystem. 3 Trading activity ough SatoshiNakamoto’s paper describing the Bitcoin protocol was published in late 2009, and his reference implementation of the Bitcoin client was released shortly aerwards, Bit- coin saw very little economic activity until 2011. [8] 

With the innovation in today’s world, someone will come up with a crypto currency backed by gold, and that could be a true medium of exchange, rather than a speculative risk asset. [7] Ripple offers a protocol that connects banks, payment providers, digital asset exchanges, digital wallets, and corporate entities via the “RippleNet”. [2] 

Those that do know are now bidding up Bitcoin’s price with the intention of flipping it for a profit, as they would any other non-yielding asset. [38]Look, this is a perfect asset for a speculative bubbleThere is a finite supply. [6] Reserve Bank of Australia Governor Philip Lowe said this month that the fascination with cryptocurrencies “feels more like speculative mania than it has to do with their use” as a form of payment. [5] 

There are those that do not feel any of the digital currencies are at a point where they should be nationally classified as an official asset. [2]Historically, assets that fluctuated as wildly as cryptocurrency have in fact ended up crashing, or “popping”. [2] 

Such implementation sent the Bitcoin’s price skyrocketing to $19,000 on certain exchanges. [3]

Bitcoin is perhaps the most impressive speculative bubble in modern history and one that will tolerate no contradiction since it gains credibility as the price soars ever higher. [40] Speculative bubbles oen feature large 8 BTC GBP EUR JPY CHF AUD CAD GLD BTC 1.00 GBP -0.03 1.00 EUR -0.02 0.63 1.00 JPY -0.06 0.23 0.12 1.00 CHF -0.04 0.65 0.93 0.28 1.00 AUD 0.00 0.53 0.50 0.24 0.46 1.00 CAD -0.02 0.47 0.47 0.12 0.45 0.63 1.00 GLD 0.07 0.31 0.41 0.16 0.39 0.42 0.34 1.00 Table 1: Correlations between changes in the USD exchange rates of Bitcoin, major reserve currencies, and gold. [8] is finding supports the hypothesis that most Bitcoin trading is driven by speculative considerations. [8] ese findings confirm a key prediction of models in which speculative behavior arises from short-sale constraints, adding support to the hypothesis that Bitcoin trading activity was driven by speculation. [8] 

is makes news coverage a uniquely good measure of the attention paid to Bitcoin as an asset. [8] Promoting bitcoin is not so much about a new asset class as its is a class of felony, yet civil authorities have so far been unwilling to shut it down. [40] 

Data e data I use to calculate investor inflow into Bitcoin comes from the leaked transaction log of the Mt. [8] In terms of the Fed’s role in regulating the use of bitcoin, Yellen said only that the Fed expects the banks it does supervise would comply with any anti-money laundering rules that any digital currency transactions could touch. [45] People can now easily use Bitcoin to transfer money to distant family members in other countries in minutes that used to take days. [40] Bitcoin, like all currencies, depends on the willingness of people to accept it. [40] If he wants to work with, say, a hedge fund like Paulson & Co. or an investment bank, say Goldman Sachs, they could cook up a deal to crash a security like Bitcoin and not even fill a conference room with the necessary decision makers. [17] Yermack also ob- serves that the Bitcoin ecosystem lacks many of the institutional features businesses have come to expect from a currency, such as banks with deposit insurance, regulatory oversight, and a well-developed derivatives market. [8] If bitcoin were a currency, you could expect to be able to use it widely. [44] “Bitcoin is a currency that sort of exists and sort of doesn’t,” writes Matthew Lynn in The Telegraph, “which you are buying not now, but in the future. [40] How do we know that Bitcoin has become more valuable? Because the cost in conventional currency that it takes to buy a Bitcoin has risen dramatically. [40] e results are therefore broadly consistent with the hypothesis that over time investors who had not previously known about Bitcoin learned about it through the news media, and decided to buy. [8] Many retail investors did not have the time to in- dependently learn about Bitcoin, and so were le out of the market until informed of its existence by media reportage. [8] is suggests that the demographic profile of the type of investor interested in Bitcoin might have shied over time towards more risk-loving, or 13 less capital-constrained, agents. [8] I show that gradual attention-driven investor inflow into the Bitcoin platform, and the lack of a corresponding outflow, created an opportunity for speculators to profit by anticipating the demand of future first-time buyers. [8] erefore, I can estimate the difference in the perception of exchange risk between those who hold Bitcoin and the general public by ex- amining the difference between the annualized interest charged for borrowing BTC and the annualized interest charged for borrowing USD. As Figure 13 shows, this difference is notable, averaging about 90 percentage points on a volume-weighted basis since June of 2013. [8] Section V investigates the existence of short- sales constraints in the Bitcoin ecosystem, and shows that exchange risk imposes large costs on would-be short sellers. [8] 

Governments can interfer with exchanges, but they cannot interfer with the blockchain) and no charges (unless you then turn it into dollars), and the number of bitcoins cannot be manipulated: it cannot be inflated; and an unhackable structure (reprogramming the blockchain to steal bitcoins requires an enormous amount of computing power). [40] Bitcoins can be used to purchase goods and services, and traded for dollars on web-based exchanges. [8] Extending the commodity analogy are Bitcoin “min- ers,” who receive newly-created Bitcoins in exchange for verifying transactions and solving processor-intensive computational problems. [8] Bitcoin was promoted as a better kind of money, which primarily is meant to serve as a medium for exchange. [40] CME Group, an options exchange, recently said it would launch a futures contract based on Bitcoin by year-end. [42] In this paper I focus my analysis on the period between early 2011, when Bitcoin started to attract public attention, and late 2013, when the price of Bitcoin peaked. 2. [8] I test this hypothesized relationship by regressing the number of Bitcoins traded per day on the volume-weighted average price of Bitcoin on that day. [8] Bitcoin disciples argue its price will rise further, viewing volatility as a necessary bump on the path to even higher valuations. [41] All activity was relatively minor: the Bitcoin price would not pass its 2011 high un- til mid-2013. [8] e price of Bitcoin, which began 2011 at less than $15 per coin increased to over $1200 a coin at its all-time high in mid-November 2013 (Figure 8).[8] is was followed by a steady but drawn-out decline–as of this writing, the price of a Bitcoin is around $250 per coin. [8] Both papers stop at presenting reduced-formVAR regression results: neither paper provides an economic explanation for their results, and neither paper is able to determine whether high prices lead to increased interest in Bitcoin or vice-versa. [8] While Yellen is mindful that the price of bitcoin could plummet, she’s confident that such an event would only likely impact the individuals that have been heavily investing in it. [16] If bitcoin stabilises, itll become used by more retailers, especially international ones; this in turn will help stablise the price. [40] 

Over the same period, the value of a single bitcoin has rocketed from around $300 to more than $11,000 this week. [41] At its peak, the total value of all Bitcoins in circulation was almost $14 billion; the cur- rent value is less than $3 billion. [8] ere is a broad consensus among Bitcoin proponents, the investment community, and interested academics that in order to generate increased demand Bitcoin needs to start estab- lish itself as either a genuinely independent currency or a major money-transfer platform. [8] Like Bitcoin, there are very few places that I can buy actual stuff with gold. [17] Gold was like $250/oz in the 80’s, $1,800/oz in 2008, and now around $1,200/oz so Bitcoin, like gold, could have wild swings. [17] Before the great vampire squid wrapped around the face of humanity, relentlessly jammed its blood funnel into Bitcoin (once it started to smell like money), hardly anyone had heard of bitcoin. [17] I think it’s far more likely that banks will create their own internal set of cryptocurrencies to move money around the world rather than deal with something as volatile as bitcoin. [40] I know that as of fairly recently one had to use bitcoins to buy etherium, but I am not sure about ripple, which moves with bitcoin, but probably more weakly than any other of all the cryptocurrencies. [17] This may yet occur, although for its future it would probaby be better for it if it could be bought directly with cash/dollars from the real world rather than having to use the horribly socially inefficient bitcoin, a bad example of first mover advantage, or perhaps the ultimate proof that the first mover should be sent to last. [17] It is conceivable that an event which causes agents to update their estimation of Bitcoin’s future fundamental value–for example, the adoption of Bitcoin by a major retailer–could also lead to increased news coverage. [8] Unfortunately, I have no additional sources of information about the characteristics of the Bitcoin investor base, so I am unable to more directly test this hypothesis, but if true it would provide even more of an incentive for speculators to try and anticipate future investor inflow. [8] The bigger bitcoin grows and the more conventional institutions such as the CME get involved, the more chance there is of investors losing money and for regulators to intervene. [41] The same technology that makes bitcoin secure as a means of exchange also makes it hideously inefficient compared to other payment technologies. [40] Bitcoin does make some sense as a medium of exchange, particularly for international and illegal payments.[40] ere is only one major exchange platform which lets Bitcoin traders go short: Bitfinex, a trading platform headquartered in Hong Kong, which has offered a platform for borrow- ing/lending both BTC and USD since mid-2013. [8] Aer investigation I conclude that Yermack and Böhme et al. are broadly correct: while onemajor exchange does facilitate short-sales of Bitcoin, lack of liquidity and exchange risk result in extremely high costs, which introduce a meaningful asymmetry between going long and short on Bitcoin. [8] ese websites maintain centralized order books and account ledgers, and match buyers and sellers of Bitcoin much as the New York Stock Exchange and Chicago Board of Trade do for equities and commodities. [8] Glaser et al. (2014) study the relationship between the amount of Bitcoin traded on exchanges and the amount of Bitcoin transacted across the entire network. [8] e total volume of Bitcoin traded on exchanges followed a similar pattern (Figure 2), starting from an average of less than $3,000 per day in 2011, spiking to a high of over $100 million per day in late 2013 and plummeting down to less than $10 million per day by July 2014. [8] e slope of the regression line is not sig- nificantly different from zero (𝑡 −0.9) 48 0 25 50 75 100 2011 2012 2013 2014 % o f V ol um e on M t.G ox Figure 17: Percent of all Bitcoin exchange volume accounted for by Mt. [8] Because Bitcoin exchanges operate without legal regulation, users who had funds stored in Mt. [8] Activity started to pick up with the launch of Silk Road, an anonymous online marketplace that let users exchange Bitcoin for illicit items such as drugs and weapons, in early 2011. [8] 

Bitcoin works off blockchain technology, akin to an anonymous digital ledger that is not currently regulated by any government or financial institution. [42] We should all be concerned that few of our leaders in government or finance have the courage to call bitcoin by its right name – the first great financial scam of the 21 st Century. [40] Bitcoin is a digital currency, also known as a cryptocurrency, that emerged after the financial crisis and is not underpinned by a central bank. [41] Bitcoin also had the supposed advantage of not being subject to devaluation by the over issuance of money by a central bank. [40] Each addi- tional news article corresponded to more than a standard-deviation increase in the amount of money spent by first-time traders on buying Bitcoin, and slightly less than 34 of a standard- deviation increase in the number of new traders entering the Bitcoin market. [8] While the supply of Bitcoin is technically also increasing over time it does so at a deterministic and publicly-known rate, so any increases in float should already be priced in. [8] “I would simply say that bitcoin at this time plays a very small role in the payments system,” Yellen said [45] Louis Chauvin admits he cannot find the iPad that is used by staff for processing bitcoin payments, as he resumes serving customers queueing to pay with their contactless bank cards. [41] 

“e digital traces of bubbles: feedback cycles between socio-economic signals in the Bitcoin economy.” [8] Given BitCoin has been around for ~10 years, it is a little hard to say it is a complete scam and worthless bubble. [40] The event that will pop the Bitcoin bubble is government taking out a pin and popping it? That’s weird, because most true bubbles manage to pop on their own. [40] I do not find Bitcoin all that useful and think that governments will in the end move to suppress it due to its money laundering issues. [40] Such warnings are widely ignored by bitcoin enthusiasts, who believe that the cryptocurrency heralds a new age of sound money separate from the debt and corruption of the dollar-centric world. [40] Some people don’t understand what Bitcoin is, but some people stand to make a fortune off the cryptocurrency. [42] We’re actually going to Ukraine later this year to check out the whole cryptocurrency ecosystem in an economy that actually understands the power of Bitcoin.[15] 

In designing my own currency as the whole model nation is a work of art, I wanted my currency to be more understandable than the Bitcoin. [17]Bitcoin can go much higher and still be a usable currency, since it goes out 8 decimal places. [40] It’s status as a currency patented & existing as a conflict of interest for Goldman Sachs because they sell more U.S. T Bills & U.S. debt papers than any other organization will depend on a destruction of the Bitcoin after which the Goldman Sachs SETLcoin will be rolled further out. [17] 

They are attracted by the numerous “benefits” of bitcoin, including the lack of a central authority and the use of a proof of work known as a “block” to add each new transaction to the existing “chain” of previous transactions. [40] e former measure captures exclusively financial activity, while the latter captures all transactions denominated in Bitcoin. [8] Today, most of the interest in Bitcoin stems not from it’s utility for transactions but from the rapid appreciation of Bitcoin relative to other currencies. [40] Without consultants or conferences or government sponsorship, the world of bitcoin has grown exponentially, attracting a growing number of participants and equally vast and growing amounts of computer resources and, in particular, electricity needed to validate each transaction. [40] The security for clearing these public transactions came from industrial strength cryptography, which effectively makes each bitcoin trade more costly to validate than the last. [40] Individuals who wish to trade Bitcoins for dollars must do so on third-party online ex- changes. [8] 

In either case, there should be a strong positive correlation in weekly differences in trading volume, as investors in both Bitcoin and the stocks should be reacting tomany of the same events. [8] Section IV shows that investors who had previously not bought Bitcoin were more likely to do so on days in which Bitcoin received news coverage. [8] The success of bitcoin has generated numerous copycat cryptocurrencies that have been sold in public offerings to equally credulous “investors” around the world in a growing carnival of securities fraud. [40] Federal Reserve Chair Janet Yellen has become the latest big-name economist to caution investors over bitcoin. [16] is suggests that while there was a large amount of investor inflow into Bitcoin during my period of study there was not much outflow. [8] J.P. Morgan CEO Jamie Dimon in September called Bitcoin a “fraud” that “will end badly” for investors. [42] Investors thinking Bitcoin is on its way from $8,000 to $10,000 and beyond, be careful. [42] 

At the time that the show aired, the Bitcoin ecosystem was extremely small, averaging around 1,100 traders and $630,000 per day. [8] I show evidence of short-sales constraints in the Bitcoin market by finding that it has been extremely expensive for traders who are bearish about the future of Bitcoin to bet against it. [8] This fits perfectly into tulip territory, and the thing I find funniest about bitcoin, is the need in every article written about it to show a metallic looking coin being representative of it, as otherwise there is no there, there. [17] 

If people trust bitcoin more than governments (for instance, it can’t be artificially inflated), then it’s worth something. [40] Sad to say, there is little likelihood of bitcoin displacing any of the existing fiat currencies sponsored by governments. [40] Technology-wise, bitcoin has two main advantages over traditional currencies: it can be transferred anywhere in the world in an hour or less with no government interference (seriously.[40] As shown in this section, there is no statistically significant relationship between Bitcoin trading activity and trading activity in major currencies or money-transfer com- pany equities. [8] ey conclude that most indi- viduals trading in Bitcoin do not do so in order to purchase goods and services, and are instead mostly interested in financial speculation. [8] Asked about Bitcoin by CNBC’s Steve Liesman on Wednesday, Yellen said she “certainly agrees” it’s important for the Fed to understand emerging risks to financial stability but argued that Bitcoin risks look “limited.” [43]Right now, most people who are buying Bitcoin don’t even understand the history or functionality of our monetary system. [15] Stripped down to its basic elements, bitcoin is a classical fraud, a form of high-tech gaming that has captured the imagination of millions of greedy and gullible people around the globe. [40] At just about any social situation, you will hear people talking confidently about bitcoin or blockchain or both. [40] The problem with bitcoin will begin when people will be wary to accept it. [40] Here are the five people who stand to make a killing when they finally cash in on Bitcoin. [42] 

Commentators also point out that tech stocks in the dotcom crash were worth $2.9tn before collapsing in 2000, whereas the market cap of bitcoin currently stands at $170bn, which could signal there is more room for the bubble to grow. [41] “Bubbles are driven by sentiment and stories, and bitcoin has a great story with a lot of mystery and spectacle to it,” Tripathi says. [41] You make a number of accurate claims about bitcoin (bubble, corruption, crime etc). [40] While Bitcoin itself may be in a bubble, the Blockchain technology behind it is not the same thing. [40] I eliminate users whose first trade was a sell order, as these are likely to be miners, inter-exchange arbitrageurs, or retailers accepting Bitcoin, all of whom were probably involved in the Bitcoin market before their first trade. [8] There is no relationship between these principal components and returns or trade volume changes in Bitcoin. [8] 

I am grateful for Bjorn de Wolf of Bitfinex for providing me with historical data concerning Bitcoin 16 ports that the borrowing cost of shorting the averageU.S. equity is about 0.6 percent per year; even the most expensive 9 percent of stocks, which D’Avolio designates as “special” stocks, with a uniquely high cost of shorting, have an average annualized interest rate of 4.69 per- cent. [8] Heisy, I think Bitcoin speculators are waiting for the new year to book gains. [43] “Is bitcoin at $40,000 by the middle of next year unthinkable? It’s not – but is there a logical and rational explanation for why it should be, I don’t think so.” [41] 

From a human rights angle, I am excited about Bitcoin when it comes to things like refugees. [17] Bitcoin is a house of cards built on quicksand propped up by the same greater fool theory that propped up past crimes and frauds like subprime mortgage backed securities. [40] In this already overheated hothouse, Bitcoin and its brethren are like internet start-ups in the mid-1990s: harbingers of a new, transformative technology. [17] 

Doug Campbell says that when your parents start buying bitcoin, that is the time to sell it. [17] The total electricity consumed today by the bitcoin “miners” who validate the transactions (and thereby earn a 25 bitcoin reward) already exceeds the total power consumption of small nations. [40]The MINING of bitcoins is increasingly difficult, but not transactions from one bitcoin holder to another. [40] 

Just think if you had money in Valenzuela, Bitcoin is fairly easy way to move your money out of government’s control. [40] While Bitcoin uses blockchains, blockchains are not unique to Bitcoin, they are a more general data integrity construct built upon Merkle hash trees (patented in 1979, so the patent has long since expired). [40] One of the “izzitabubble?” evaluators I use to judge Bitcoin by is the “shoeshine boy” test. [17]They do not understand what bitcoin is, and so they cannot assess its relative worth or use. [40] 

Thanks to several of you for correcting me on needing bitcoin to buy other cryptocurrencies. [17] It has been more than a month since bitcoin was used to buy a flat white or craft beer sold at the Old Shoreditch Station, according to the hospitality manager at the east London bar. [41] 

is is because all exchange rates are two-sided: the BTC/USD exchange rate is dependent on both the strength of Bitcoin and the strength of the dollar. [8] While you’ll read that 60,000 merchants “now accept Bitcoin” the truth is most will require dollars from exchangers who split the dollar rakeoff with the merchant. [40] 

The reason any U.S. resident citizen wants U.S. dollars is that they have to settle their federal taxes with U.S. dollars, Uncle Sam will not accept chickens, gold, Yen, or Euro, or bitcoin. [17] The system was designed to make it harder and harder to mine bitcoins, and then at some point in the future, I think it is sometime late this century, no more bitcoins can be mined. [40] I think with the new futures contracts Bitcoin will become even more volatile in the short term. [17] Bitcoin futures and options may just as well be based on pixies and fairies. [40] 

Bitcoin has no intrinsic value and is close to being infinitely divisible. [17] Speculators anticipated this process and bought Bitcoin before it was well-known, essentially profiting off being aware of Bitcoin before the general public. [8] 

ey conclude that while the technology behind Bitcoin has promise, it does not currently offer an especially compelling advantage over other means of payment. [8] Meiklejohn, Sarah, Marjori Pomarole, Grant Jordan, Kirill Levchenko, Damon McCoy, Ge- offreyMVoelker, and Stefan Savage.A fistful of bitcoins: characterizing payments among men with no names. characterizing payments among men with no names. [8] 

It may have no fundamental, and from what I have heard, this is widely accepted among the more sophisticated bitcoin traders. [17] e rest of the paper is organized as follows: Section I provides a background description of the technical features, trading ecosystem, and recent history of Bitcoin. [8] I thought the bitcoin etf was trading 80% above its NAV. Ironic really. [17] Bitcoin was trading near $16,400; at Yellen’s last press conference in September, bitcoin was trading near $3,700. [45] Bitcoin, the blockchain, cryptocurrency, the token economy, and FinTech. [40] Gox represents the first interaction with the Bitcoin market. [8] In the case of “Bitcoin for Dummies,” the first online reference to the episode comes from the discussion site BitcoinTalk on November 29, 2011.6 Over the next six weeks, the users of BitcoinTalk discussed the benefits the episode might bring to Bitcoin. [8] 

e plot of this episode centered on Bitcoin, and featured a cameo by Jim Cramer, ofMadMoney fame, (fictionally) endorsing it as an investment.[8] From an investment perspective, the only reason to hold bitcoin is the belief that a greater fool will pay more tomorrow than you did today. [40] 

The most valuable and best known of the roughly 1,300 cryptocurrencies, Bitcoin topped $8,000 Monday, extending its year-to-date gain to more than 750%. [42] I find that it shows evidence of a pronounced disagreement between those who own Bitcoin and those who do not. [8] To test this theory, I cal- culate correlations between weekly log returns and weekly changes in log volume of Bitcoin and the stocks of the three largest money-transfer companies in the United States: Euronet, MoneyGram, and Western Union. [8] Gox’s position within the broader Bitcoin ecosystem frombiasingmy results, I restrictmy data to the period before the noticeable changes started to occur. [8] 

In practice this is oen very inconvenient, as the user risks losing all of her Bitcoins if she experiences computer problems which corrupt the wallet. [8] ese costs make it harder for businesses to manage the risk of transacting in Bitcoin, discouraging Bitcoin- denominated commerce. [8] 

Perhaps most interestingly, the three accounts which bought the most Bitcoin during the month before the episode aired– together accounting for a net stake of about $214,000, approximately equivalent to a day’s total trade volume–sold nearly all of their holdings in the three days aerwards. [8] After getting the bitcoin party started with a few initial trades, the enigmatic Satoshi disappeared, leaving his creation to expand pretty much on its own. [40] 

You might be right about government intervention crashing bitcoin (and it will crash at some point). [40] e provably overpriced equities identified by Lamont andaler (2006) experienced maximummonthly borrowing costs of 10-50 percent (annualized); the maximummonthly borrowing cost for shorting Bitcoin on Bitfinex was 42 percent (annualized), and annual- ized rates were higher than 10 percent for about half of 2013. [8] During a press conference following the Fed’s latest monetary policy decision, Yellen was asked about recent gains in the stock market and bitcoin and whether the central bank has factored in these rises in its assessment of the economy. [45] A better example of market euphoria and excess is the meteoric rise of the digital currency Bitcoin. [42] This now appears to be firmly established, not to go away whatever happens to bitcoin or any of the other cryptocurrencies. [17] Recent developments have led to optimism that Bitcoin and other cryptocurrencies will gain more widespread acceptance. [42] It is not the ECB’s responsibility to ban or regulate bitcoin or other cryptocurrencies. [44] 

Böhme et al. provide a general introduction to the Bitcoin protocol, focusing on its potential as a replacement for existing monetary and payment systems. [8]

As for bitcoin having no “intrinsic value’, over 2 million transactions every week globally between people, businesses, charities and more say otherwise. [6] Transaction speeds for Bitcoin and Ethereum are currently slower than expected. [2] 

Should traders postpone sales of goods and services sold through bitcoin because they might receive a higher price for the same number of bitcoins tomorrow? Should buyers put off purchases to wait for the value of bitcoin to decline? Are bitcoins, like traditional currencies, divisible into smaller denominations to allow for variations in prices? These are questions that a healthy currency doesn’t pose to its users. [46] On 3 March 2017, the price of a bitcoin has surpassed the value of gold for the first time and its price surged to an all-time high. [47] 

PayPal President David A. Marcus calls bitcoin a “great place to put assets” but claims it will not be a currency until price volatility is reduced. [47]According to Andolfatto, the price of bitcoin “consists purely of a bubble,” but he concedes that many assets have prices that are greater than their intrinsic value. : 21 Speculation in Bitcoin has been compared to the tulip mania of seventeenth-century Holland. [47] “It’s going to be another commodity-like asset out there that you can trade and mainly as a store of value,” said El Erian, adding that while he does not own any bitcoin, he would be a buyer at $5,000, chalking it up to a “gut feeling.” [20] According to the paper, this use case is the underlying value of the bitcoin asset.[9] When Bitcoin was first introduced 8 years ago it’s not like everyone immediately calculated the expected cashflows and decided not to invest–a large fraction of the potential investor base didn’t even know there was an asset to evaluate. [22] Buffett says Bitcoin is difficult to value because it’s not a value-producing asset. 16 Stocks represent ownership of real capital and often provide a stream of dividend income; Bitcoin provides neither real capital nor income. [48] Bitcoin has transformed from an idea that some treated with great enthusiasm to an asset of strikingly growing value. [46] Bitcoin is a digital asset designed by its inventor, Satoshi Nakamoto, to work as a currency. [47] The Commodity Futures Trading Commission classifies bitcoin as a commodity, and the Internal Revenue Service classifies it as an asset. [47] 

People are buying up bitcoins, driving up the price of the 16.7 million coins in circulation to a total value of $265 billion as of midday Thursday. [49]The rate of increase in available bitcoins is not keeping pace with the number of people keen to buy them, so the price of a bitcoin keeps increasing. [10] It is extremely difficult to use bitcoin as a currency, since the price of goods valued in bitcoin is at the moment rising dramatically.[46] My results suggest that these price booms could actually be fueled by the news coverage of Bitcoin, independent of any actual “rational” changes in beliefs about its utility or prospects as a global currency. [22] The price of Bitcoin fluctuates on exchanges, and Bitcoin often trades at different prices on different exchanges, which further complicates pricing decisions by sellers. 10 Finally, the high cost of one Bitcoin relative to the price of ordinary goods requires merchants to quote Bitcoin prices for most goods to four or five decimal places. [48] This speculation by investors has driven Bitcoin prices to rise so fast that some financial experts call it a “financial bubble.” [48] Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of bitcoin. [47] Its value, like that of the dollar, is its ability to use bitcoins to purchase things. [46] As of March2014, the bitcoin market suffered from volatility, limiting the ability of bitcoin to act as a stable store of value, and retailers accepting bitcoin use other currencies as their principal unit of account. [47] The use of bitcoin for illicit purposes has long been the most controversial aspect of the cryptoasset, although it has taken a back seat to speculation around the bitcoin price over the past few years. [9] “Bitcoin: One year on from peak price, what does the future hold?”. [47] These results matter because there have been a lot of bitcoin “explainers” over the years, including very recently, often coinciding with sharp increases in price. [22] To improve access to price information and increase transparency, on 30 April 2014 Bloomberg LP announced plans to list prices from bitcoin companies Kraken and Coinbase on its 320,000 subscription financial data terminals. [47] In the latter half of 2012 and during the 2012-13 Cypriot financial crisis, the bitcoin price began to rise, reaching a high of US$266 on 10 April 2013, before crashing to around US$50. [47] 

The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts. [47] The first instability stems from an inflexible supply curve of Bitcoin, which amplifies Bitcoin price volatility; the miners’ revenue/reward fully absorbs any price changes. [47] The decline of bitcoin intensified on Thursday, as prices fell crept below $6,600 for the second time this week. [20] In January 2015, noting that the bitcoin price had dropped to its lowest level since spring 2013 – around US$224 – The New York Times suggested that ” ith no signs of a rally in the offing, the industry is bracing for the effects of a prolonged decline in prices. [47] The key is that bitcoin as a commodity has only an exchange value. [46] Bitcoin lives on the internet, not as physical currency but that hasn’t stopped traders from driving up the cryptocurrency’s value. [49] Bitcoin surged past $17,000 Thursday — and briefly hit $19,000 — as the frenzy surrounding the virtual currency escalated just days before it starts trading on major U.S. exchanges. [49] 

This story suggests a hypothesis: for a novel asset like Bitcoin, any news is good news. [22] This model breaks down when we think about genuinely new asset classes, like Bitcoin. [22] 

e model presented here builds heavily off of the model suggested by Miller (1977), and refined by Harrison and Kreps (1978) and Scheinkman and Xiong (2003) which shows that, in the presence of a short-sales constraint, investor disagreement about the future value of a risky asset can lead to inflated asset prices. [8] Harrison and Kreps (1978) show that in infinite time the price bubble persists and includes an additional component: speculators become willing to buy the risky asset at a price above their fundamental valua- tion because they plan on reselling it to another agent, with whom they agree to disagree, in the future. [8] As Odean (1999) observes, while retail investors can theoretically choose to buy any of the thousands of assets tradeable through their brokerage, they only have the time to form price 7 expectations about a handful. [8] Previous analyses of the relationship between attention and retail investor purchases, such as Barber and Odean (2007) and Seasholes and Wu (2007), use abnormally-high trad- ing volume and price changes as a proxy for the amount of attention retail investors pay to an asset. [8] 

With a short-sales constraint in place, pessimists are unable to bet against the asset when they market price dips below their expected value, and are forced to exit the market. [8] The other, not necessarily all that clearly distinguishable from the former, involves an asset price that rises due to people buying due to an expectation that they will get a capital gain from its expected future price rise, with this then happening due to a self-fulfilling prophecy, with eventually the price falling sharply, with this not necessarily involving a fall towards a fundamental because the asset may have no fundamental at all. [17] is suggests that an increase in the amount of atten- tion paid to an asset can increase the price of that asset, even in the absence of any changes in the asset’s underlying fundamentals. [8] 


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