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The bubble dynamics of bitcoin

Can bitcoin be a currency if you never know its value? Living outside the traditional banking network by design, its fluctuating value makes it too cumbersome for petty transactions. Yet despite the hurdles, bitcoin and its underlying technology is seen as a kind of "digital gold." Economics correspondent Paul Solman reports.

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  • John Yang:

    Economics correspondent Paul Solman has been looking into cryptocurrencies for us, most recently, trying to explain what they are and how to buy them. Tonight, he looks at whether the price of bitcoin is a bubble? This story is part of his weekly series, “Making Sense”.

    (BEGIN VIDEOTAPE)

  • Paul Solman:

    Back when Mexicali Burrito’s David Zimel first accepted bitcoin a few years ago, it was worth — well, about the price of a burrito.

  • David Zimel:

    I think we had two sales.

  • Paul Solman:

    Two sales?

  • David Zimel:

    I think we ended up with about nine bitcoins. And we just kept on pushing. We wanted to turn it into real cash, we wanted to turn it into real cash and we finally did.

    I wish we would’ve held on to it a little longer cause it would have been worth a few thousand dollars.

  • Paul Solman:

    Make that $80,000 as I record, though by the time you see or hear this, who knows?

  • Woman:

    You’re going to get .0016 bitcoin.

  • Paul Solman:

    I’d bought my first 16 ten-thousandths of a bitcoin that very morning for $20 when the price of a whole coin was $8,600. I wound up with a princely $13 dollars and 82 cents worth after knavish transaction fees.

    If I wanted to use it here now to buy a burrito. Yes? No?

  • David Zimel:

    No, we have no idea what to do with it. I wouldn’t have any idea on how to exchange it or what it’s worth.

  • Paul Solman:

    No wonder. When Zimel cashed in his bitcoins, they were worth just a few bucks. Last December, the price hit nearly $20,000, plunged by two thirds, is now up again by half. So, how can it be a currency if you never know its current value?

  • Vikram Mansharamani:

    It is developing many of the qualities of currencies but it isn’t yet filling the basic role of a currency which is to enable transactions.

  • Paul Solman:

    Professor, author and hedge fund manager Vikram Mansharamani.

  • Vikram Mansharamani:

    You do need some more stability in the value of it before it gets truly adopted as a currency, not as an instrument of speculation. Today it’s de facto an instrument of speculation or a means through which to fund illicit activities off the grid. Bitcoins and sort of other cryptocurrencies live outside of the traditional banking network. And in fact are intended to do so by design.

  • Paul Solman:

    That’s why the NEWSHOUR wouldn’t accept a bitcoin donation in 2013, when stories abounded about its use on the so-called Dark Web, to buy drugs, guns, and sex.

    But local restaurants like Veggie Galaxy in Cambridge that used to take bitcoin don’t any more because the value fluctuates too much, plus it’s too cumbersome for petty transactions. Can I buy my lunch with bitcoin?

  • Man:

    I’m sorry, we used to, but not anymore. We actually had an ATM. But we don’t have it anymore. I’m sorry.

  • Paul Solman:

    A bitcoin ATM, that is.

    Nearby Thelonious Monkfish does still take bitcoin, but because of transaction fees and the hassle, only if you spend $100 or more.

    So I’d have to order a lunch that was more than $100 to use bitcoin?

  • Man:

    Right. To get to — to get the transaction go through.

  • Paul Solman:

    Look, we even went to a bitcoin dealer, the La Chic Boutique Pawnshop in Somerville. For cash, you can pick up designer bags by the dozen, a pair of Shaquille O’Neal’s hard- to-fill shoes, even this Poppin’ Fresh pendant whose provenance can be traced to Boston mobster Whitey Bulger.

    But to do a bitcoin deal —

  • Man:

    You sign up an account and then we can meet over there at starbucks and we can transfer money at that time.

  • Paul Solman:

    Proprietor Dylan McDermitt.

    Well, why can’t we do it here in the store?

  • Dylan McDermitt:

    Regulation at this point, we can only sell and charge a small fee. But buying? Not at this point.

  • Paul Solman:

    But we can do it outside, at the local bar or the local cafe here?

  • Dylan McDermitt:

    Yes. We pay 90 percent as well.

  • Paul Solman:

    Yes, only 90 percent of market value, plus a small transaction fee. And yet, despite all the hurdles to using it, bitcoin, and its underlying Blockchain technology, are seen as fat city. Consider the recent rash of conversion experiences. In December, Long Island Iced Tea re-named itself Long Blockchain and its stock price tripled.

  • Women:

    Welcome to Hooters!

  • Paul Solman:

    In January, a company with nine Hooters franchises put its loyalty program, the Hooters Hoot Club on a Blockchain, and its stock price jumped 50 percent.

  • Richard Thaler:

    I’m no expert on bitcoin.

  • Paul Solman:

    Richard Thaler won this year’s Nobel Prize in economics.

  • Richard Thaler:

    But it’s very hard to know what its intrinsic value is and it’s very hard to know what it’s legitimate use is. It certainly looks like a bubble to me.

  • Paul Solman:

    Vikram Mansharamani, who taught a course at Yale on bubbles, agrees.

  • Vikram Mansharamani:

    It reminds me of the Internet phenomenon, the Internet bubble, where people would add the dotcom and their stock price would go flying up — exactly comparable in my eyes.

  • Richard Thaler:

    But you know, bubbles sometimes keep going up.

  • Paul Solman:

    So, is bitcoin a bubble that’s already bursting, plunging by two-thirds in just a few months? Or a great investment that’s up more than 100-fold in the last five years?

    Mansharamani’s book, “Boombustology,” looks for bubbles through several lenses.

  • Vikram Mansharamani:

    The first lens is microeconomics. Normally, when you have higher prices for a good, you should see less demand. When higher prices generate more demand, we have a bubbly dynamic that results in higher prices generating more demand, generating higher prices, et cetera.

  • Paul Solman:

    In other words, instead of turning off buyers, the rising prices are attracting them, triggering another lens: buying an investment on credit.

  • Vikram Mansharamani:

    Are people borrowing money to invest in something because they are so sure it’s going to continue rising? And in fact, we’ve seen that recently.

    Lens three, people want to believe.

  • Paul Solman:

    The psychology of irrational exuberance.

  • Vikram Mansharamani:

    They want to believe in a new story, a new era, a new dynamic. This is a common phenomenon.

    We saw this back in the 1920s with radios and cars. You saw it during the Internet bubble where the Internet was going to change everything and in fact you can see it today in this crypto domain, where this is the new form of money. Digital gold.

  • Paul Solman:

    Mansharamani’s last lens is a question, is the enthusiasm epidemic?

  • Vikram Mansharamani:

    Think of a speculative mania as a fever spreading through a population. How many people are left to infect? Well, if everyone is infected, the disease has run its course, we’re done!

  • Paul Solman:

    But you don’t know that, right?

  • Vikram Mansharamani:

    No idea at all how much of the price is attributable to actual fundamental interest in a non-printable currency versus “this is a party, it’s rockin’, I want to join it.”

  • Paul Solman:

    So, is the party over, or about to get its second wind?

    As with any investment, Mansharamani doesn’t know, and neither do you or, even as the well-seasoned economics correspondent for the PBS NEWSHOUR, do I. This is Paul Solman reporting.

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