The bubble dynamics of bitcoin


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, PBS NEWSHOUR ECONOMICS CORRESPONDENT:
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, MEXICALI BURRITO: I think we
had two sales. SOLMAN: Two sales? 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. SOLMAN: Make that $80,000 as I record, though
by the time you see or hear this, who knows? UNIDENTIFIED FEMALE: You’re going to get .0016
bitcoin. 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? 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. 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, AUTHOR, “BOOMBUSTOLOGY”:
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. SOLMAN: Professor, author and hedge fund manager
Vikram Mansharamani. 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. 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? UNIDENTIFIED MALE: I’m sorry, we used to,
but not anymore. We actually had an ATM. But we don’t have it anymore. I’m sorry. 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? UNIDENTIFIED MALE: Right. To get to — to get the transaction go through. 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 — UNIDENTIFIED MALE: You sign up an account
and then we can meet over there at starbucks and we can transfer money at that time. SOLMAN: Proprietor Dylan McDermitt. Well, why can’t we do it here in the store? DYLAN MCDERMITT, PROPRIETOR: Regulation at
this point, we can only sell and charge a small fee. But buying? Not at this point. SOLMAN: But we can do it outside, at the local
bar or the local cafe here? MCDERMITT: Yes. We pay 90 percent as well. 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. UNIDENTIFIED FEMALES: Welcome to Hooters! 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, UNIVERSITY OF CHICAGO: I’m
no expert on bitcoin. SOLMAN: Richard Thaler won this year’s Nobel
Prize in economics. 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. SOLMAN: Vikram Mansharamani, who taught a
course at Yale on bubbles, agrees. 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. THALER: But you know, bubbles sometimes keep
going up. 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. 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. SOLMAN: In other words, instead of turning
off buyers, the rising prices are attracting them, triggering another lens: buying an investment
on credit. MANSHARAMI: 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. SOLMAN: The psychology of irrational exuberance. MANSHARAMI: 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. SOLMAN: Mansharamani’s last lens is a question:
is the enthusiasm epidemic? MANSHARAMI: 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! SOLMAN: But you don’t know that, right? MANSHARAMI: 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.” 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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