Bitcoin mania is showing few signs of slowing down with prices surging to $US11,390, an all-time high, on Wednesday.
About the only thing rising faster than the cryptocurrency is the number of people who think it’s a bubble.
Look at this chart, showing the Bitcoin price overlaid against Google searches for “Bitcoin bubble”.
Many are sceptical of the speed of the price move, including John Higgins and Kerrie Walsh, analysts at Capital Economics.
While admitting they don’t know how long the mania will last, they say it is exhibiting a defining feature of asset bubbles historically: people are buying on the expectation that prices will continue to surge.
“The surge in the price of the cryptocurrency over the past couple of months in particular seems to have had a lot to do with speculation that demand for it is set to increase and little to do with a reassessment of its fundamental value,” they said in a note released after Bitcoin’s surge above $US10,000 earlier this week.
This is a salient feature of bubbles, as J.K. Galbraith noted in his seminal work on the Great Crash in 1929. “It is another feature of the speculative mood that, as time passes, the tendency to look beyond the simple fact of increasing values to the reasons on which it depends greatly diminishes. And there is no reason why anyone should do so as long as the supply of people who buy with the expectation of selling at a profit continues to be augmented at a sufficiently rapid rate to keep prices rising.”
That appears to be what’s happening now with people continuing to pile in despite Bitcoin’s price jumping over 250% since mid-September.
Until people stop believing that others will buy at even higher prices, the rally could go on for some time yet.
However, as seen in other asset bubbles in the past, when sentiment finally turns, the subsequent price decline is often more rapid than the rally which preceded it.