New Finance Institute Unmasks the Bitcoin Bubble Confusion: Misconceptions in Plain Sight
Correcting the crypto bubble narrative
This person thought Bitcoin is not a bubble. He built his case on incorrect and incomplete promises. As they say, garbage in, garbage out.
Then, there is a whole host of reputable practitioners and economists who think Bitcoin is a bubble and we disagree with them, too. This is familiar territory for us when it comes to financial definitions. You may recall that we did not agree with several crypto critics either, to the extent their opinion was that one can invest in Bitcoin. Sadly, this is almost all of the critics.
A quick tour around the country:
Nassim Taleb
Renowned author, Nassim Taleb, who wrote The Black Swan: The Impact of the Highly Improbable, also has strong opinions on Bitcoin:
Taleb became a bit more aggressive when Bloomberg Crypto picked up his tweet:
Ahh, such conviction. Only if he were right! The problem is that Taleb doesn’t even understand what investing is, nor does he appreciate why crypto can’t be a bubble. He doesn’t realize that he is part of the problem, just as many other crypto proponents and critics alike are. Both contingents are nonchalant when using the word investing and it’s an extremely dangerous mislabeling that is beginning to engulf our youth; it’s about time that we start calling these folks out and working on a solution to reach consensus and using the words correctly, especially when they are addressing such a wide audience.
Here is a paper (PDF) that Taleb published in Quantitative Finance, where he stated:
The difference between the current bitcoin bubble and past recent ones, such as the dot-com episode spanning the period over 1995-2000, is that shell companies were at least promising some type of future revenue stream. Bitcoin would be allowed to escape a valuation methodology had it proven to be a medium of exchange or satisfied the condition for a numeraire from which other goods could be priced. But currently it is not, as we will see next.
Taleb almost gets it right, but doesn’t realize he is completely blindsided by a major definitional issue. The lack of a revenue stream is precisely what gets you out of the bubble label. Lack of cash flows means an asset can’t be valued. If it can’t be valued, one cannot invest in it. Also true: if it can’t be valued, there can be no bubble in the first place. It doesn’t make much sense to conclude that there is substantial overpricing relative to intrinsic value if there is no intrinsic value calculation possible to begin with.
The irony is rich. The definition of bubble and the definition of investing for that matter, is a black swan event for Taleb. Here is what the book’s Amazon description says:
We concentrate on things we already know and time and time again fail to take into consideration what we don’t know.
And:
For years, Taleb has studied how we fool ourselves into thinking we know more than we actually do.
When it comes to investing, Taleb may soon need to reckon with the implications of his own theories.
Elliott Investment Management
Founded in 1977, Elliott is one of the oldest investment managers of its kind under continuous management and, as of June 30, 2024, manages approximately $70 billion in assets.
This is what they said in a recent letter:
Another one bites the dust.
Burton Malkiel
Burton Malkiel is Chemical Bank Chairman’s Professor of Economics, Emeritus at Princeton. He is best known for his finance classic A Random Walk Down The Street: The Time-Tested Strategy for Successful Investing. It has sold more than 1.5 million copies and has been translated into nine languages.
In the 2020 edition linked above, Burton Malkiel stated:
[T]here are clear indications that the rise in the prices of Bitcoin and other digital currencies represents a classic bubble.
Malkiel may have talked about random walks down the street, but we are not talking about random guys on the street here. These are very smart, respected people who are at the top of the field. Yet, they all characterize crypto as a bubble, which is incorrect.
This sentiment resonates through the industry as the aforementioned individuals and institutions fall prey to the mischaracterization of cryptocurrencies as bubbles or investments. The parallel between Elliott's long-standing reputation and the alarmist tone of their investor letter highlights a pervasive misunderstanding within even the most seasoned financial circles.
Cryptocurrencies, devoid of regular cash flows and therefore intrinsic value, cannot fit traditional investment frameworks. Their inflated prices may suggest a bubble to the untrained eye, but labeling them as such ignores the fundamental principles that define financial bubbles. The misuse of terms like 'bubble' and 'investment' when referring to Bitcoin reveals a crucial gap in comprehension—a gap that even experienced firms must navigate. The persistence of these misconceptions underscores the importance of clear, accurate definitions in the financial discourse surrounding new and emerging assets.
This is how powerful definitions, or rather, the lack of adherence to them can be. You blink, and you’ve completely changed course, and worse, without fully realizing it. When one criticizes Bitcoin as a risky investment, or even as a speculative investment, what people hear is: “oh well, one way or another, it’s still an investment.” and they develop narratives about why it is not risky or not speculative. You call it a bubble and people start making videos explaining why it’s not a bubble. Both positions are wrong!
We must cut through all the noise and deliver this message to the masses—only then can we smooth out the bumpy ride ahead and achieve consensus.
