When Bitcoin Crashes

by: Scott Sumner

When bitcoin crashes, I predict people will say it was a bubble, even though it wasn't. The term 'bubble' can mean many things, but the sine qua non of definitions includes "rejection of the EMH." But the EMH says that bitcoin is very likely to crash. Why is this so, and why don't people know this?

  1. We know that market volatility is serially correlated. Markets that have been highly volatile are likely to remain highly volatile.

  2. Bitcoin prices are super volatile.

  3. The EMH predicts that expected returns are near zero. Combined with high volatility, this mean the EMH predicts that bitcoin will exhibit large price increases and large price decreases at various times in the future.

When the bitcoin price crash comes, most people will wrong say; "Aha, I told you that it was a bubble." But why?

Because they will have forgotten about their first bubble prediction. People were calling it a bubble at $2, and again at $30. Now it's over $200. If it plunged to $35 dollars, the bubble predictors will say they were right all along, but they will have been wrong. They've merely remember their bubble predictions, not where bitcoin was when they made the predictions.

[Ha! I wrote this yesterday and delayed posting--that'll teach me. It's $160 tonight.]

But the internet never forgets anything. And I'll search and search and expose every phony "I told you so." I can't predict where bitcoin is going, but I can predict there will be many false "bubble" claims when it eventually crashes-and it will crash. The only question is whether it will crash from a price so far above the current price, that it's still a good buy at $200. $160.

And the EMH says that the answer to that question is; "God only knows."

Memo to commenters: All comments telling me why bitcoin is a bubble will be ignored, as they'll show you missed the entire point of the post.