Of Bitcoin and Bubbles
The Bitcoin narrative involves stories about inspired cosmopolitan young
people, contrasting with uninspired bureaucrats; a story of riches, inequality,
advanced information technology, and involving mysterious impenetrable
jargon. The Bitcoin epidemic has progressed as a cascading sequence of
surprises for most people. Bitcoin surprised when it was first announced, and
then it surprised again and again as the world’s attention continued to grow by
leaps and bounds. At one point, the total value of Bitcoin exceeded US $300
billion. But Bitcoin has no value unless people think it has value, as its
proponents readily admit. How did Bitcoin’s value go from $0 to $300 billion in
just a few years?
The beginnings of Bitcoin date to 2008, when a paper titled “Bitcoin: A Peer-
to-Peer Electronic Cash System,” signed by Satoshi Nakamoto, was distributed
to a mailing list. In 2009, the first cryptocurrency, called Bitcoin, was launched
based on ideas in that paper. Cryptocurrencies are computer-managed public
ledger entries that can function as money, so long as people value these entries as
money and use them for purchases and sales. There is an impressive
mathematical theory underlying cryptocurrencies, but the theory does not
identify what might cause people to value them or to believe that other people
will also think they have value.
Often, detractors describe the valuation of Bitcoin as nothing more than a
speculative bubble. Legendary investor Warren Buffett said, “It’s a gambling
device.”1 Critics find its story similar to the famous tulip mania narrative in the
Netherlands in the 1630s, when speculators drove up the price of tulip bulbs to
such heights that one bulb was worth about as much as a house. That is, Bitcoins
have value today because of public excitement. For Bitcoin to achieve its
spectacular success, people had to become excited enough by the Bitcoin
phenomenon to take action to seek out unusual exchanges to buy them.
For Bitcoin’s advocates, labeling Bitcoin as a speculative bubble is the
ultimate insult. Bitcoin’s supporters often point out that public support for
Bitcoin is not fundamentally different from public support for many other things.
For example, gold has held tremendous value in the public mind for thousands of
years, but the public could just as well have accorded it little value if people had
started using something else for money. People value gold primarily because

they perceive that other people value gold. In addition, Peter Garber, in his book
Famous First Bubbles (2000), points out that bubbles can last a long time. Long
after the seventeenth-century tulip mania, rare and beautiful tulips continued to
be highly valued, though not to such extremes. To some extent, tulip mania
continues even today, in a diminished form. The same might happen to Bitcoin.
Nonetheless, the value of Bitcoin is very unstable. At one point, according to
a headline in the Wall Street Journal, the US dollar price of Bitcoin rose 40% in
forty hours2 on no clear news. Such volatility is evidence of the epidemic quality
of economic narratives that may lead to an erratic jostling of prices.
I will make no attempt here to explain the technology of Bitcoin, except to
note that it is the result of decades of research. Few people who trade Bitcoins
understand this technology. When I encounter Bitcoin enthusiasts, I often ask
them to explain some of its underlying concepts and theories, such as the Merkle
tree or the Elliptic Curve Digital Signature Algorithm, or to describe Bitcoin as
an equilibrium of a congestion-queuing game with limited throughput.3 Typically
the response is a blank stare. So, at the very least, the theory is not central to the
narrative, except for the basic understanding that some very smart
mathematicians or computer scientists came up with the idea.
Narrative economics often reveals surprising associations. Reaching back into
history, we see the beginnings of the emotions behind the Bitcoin epidemic in
the origins of the growth of anarchism in the nineteenth century.