{"id":12194,"date":"2021-12-31T20:00:00","date_gmt":"2021-12-31T20:00:00","guid":{"rendered":"http:\/\/ci02960819200026c3"},"modified":"2025-10-01T13:27:27","modified_gmt":"2025-10-01T18:27:27","slug":"asset-bubbles-covid-19-make-bitcoin-case","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/markets\/asset-bubbles-covid-19-make-bitcoin-case","title":{"rendered":"How Bubbles, Price And COVID-19 Changed Bitcoin for Me"},"content":{"rendered":"
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I trained as a financial historian. My academic work focused on banks and financial markets in the past, and I was always fascinated by iconic bubbles of financial history<\/a> \u2014 the tulip mania, the financial boom of the 1690s, the South Sea Company and Britain\u2019s many financial panics in the 19th century<\/a>. <\/p>\n

I wrote a thesis on the 1847 commercial crisis. I analyzed financial returns on London\u2019s stock market in the Victorian and Edwardian eras, and showed that returns then squared well with the first round of factor analyses developed a century later. I investigated the Bank of England’s role in the 1857 crisis, the 1866 Overend, Gurney & Company collapse<\/a> and the 1890 bailout<\/a> of Baring Brothers. (If you are under the impression that financial crises, government mismanagement and central bank<\/a> bailouts only happened in the post-1971 era of modern monetary debasement, you are sorely mistaken). <\/p>\n

You could, Ray Dalio-style, say that nothing is new under our financial sun: many of these past crises map well onto more modern ones<\/a> \u2014 perhaps, because there are only so many ways<\/a> to make losses or catastrophically ruin monetary arrangements. <\/p>\n

While the concept of \u201cbubbles\u201d runs freely across the chronicles of financial history and those who study it, I was less convinced. The hand-waving arrogance with which well-established financial historians would denounce something as a bubble, delusion or financial madness would be familiar to most bitcoiners reading The New York Times<\/em> or The Economist<\/em> today. Mostly, these otherwise astute academics meant to launch derogatory remarks on the sorts of people who handled assets, and implied that real-world plebs in trading pits or exchanges couldn\u2019t possibly possess knowledge of the superior kind with which their own university libraries embodied them. Worse, when pushed, the idea of bubbles never seemed to mean much else than \u201cwhat goes up must come down.\u201d<\/p>\n

What fascinates me about Bitcoin is the questions it poses for monetary economics \u2014 monetary rules, macroeconomic stability, regression theorem, Gresham’s law<\/a> and the classification of fiat-commodity money<\/a>. When I first heard rumblings of this technological solution to overthrow the state\u2019s monetary monopoly, I mostly denounced it as hopeful technobabble. My orange-pilled friends couldn\u2019t explain why it mattered monetarily, how it improved much on what we had (or with better central bankers, could<\/em> have). The use value seemed altogether superfluous in a fintech world where moving value was easier than ever and central banks couldn\u2019t even hit their inflation targets, let alone shove us over the brink of hyperinflation. <\/p>\n

Then, two things changed: price and COVID-19.<\/p>\n

To many laymen, reasoning from a change in asset price seems like an asinine and bubble-fueled reason to change one\u2019s mind \u2014 the quintessential herd mentality. To convince you that it\u2019s not, I return to the idea of bubbles before I argue that Bitcoin is the monetary escape hatch necessary in a less free world. <\/p>\n

Prices Know Something You Don\u2019t<\/h2>\n

At the base of economics lies an information and calculation argument: real market prices, emerging in trade between willing participants, generate information about the world. It allows us to calculate profits and losses, to see if what we make is worth more than what we put in. It allows market participants (i.e., all of us) to grasp what\u2019s going on \u2014 not, mind you, in the news agency way of broadcasting highly-curated pictures from afar, but by informing your economic decisions. Shortages and price declines<\/a> tell us what\u2019s scarcer and more plentiful, what\u2019s in high demand and what is better used elsewhere. <\/p>\n

Financial markets and assets do the same thing for society\u2019s current and future allocation of savings. The prices of securities vary more than market prices because the (far-off) future and how to assess it is less knowable than the immediate present or recent past. The \u201ctrouble with bubbles<\/a>\u201d is that nobody knows the future. <\/p>\n

Asset prices incorporate the knowledge that exists about the present and forecasts the future in the best way that we know how. If owners of securities are wrong about that future, they lose money or miss out on profitable investments. Scott Sumner of the Mercatus Center<\/a> at George Mason University explains this well for the two most recent bubbles in U.S. financial history: the dot-com bubble in the late \u201990s and early 2000s, and the housing bubbles a few years thereafter:<\/p>\n

\n

\u201cI think asset prices are usually relatively efficient based on fundamentals. I’m very dubious of people who claim that such and such a market is obviously overvalued<\/strong>. Most experts, I think, believe that the tech stocks in 2000 were obviously overvalued, or housing prices in 2006 were obviously overvalued\u2026 people [were] saying things like \u2018those stock prices only make sense if you think American internet firms will eventually dominate the global economy.\u2019<\/strong><\/p>\n

“Well, they do now. Or the 2006 housing prices would only make sense if you think interest rates will get lower and lower and NIMBY [not in my backyard] regulations will stop new construction. <\/strong>Well, both of those things have happened and we\u2019re now at a new normal of much higher housing prices in America. I think these markets we’re picking up some long-term trends that really did change the traditional fundamental price earnings ratio or rent price ratio in housing.\u201d<\/p>\n<\/blockquote>\n

Knowing that something is \u201cobviously overvalued\u201d is the kind of extreme hubris that opponents of Bitcoin suffer from in outsized amounts. The fundamental value is zero, says economist Steve Hanke<\/a>; as renowned and astute a writer as Nassim Taleb<\/a> wrote some mathematical equations and proved (\u201cproved\u201d) that bitcoin\u2019s fundamental value was nil. How could they possibly know that?<\/p>\n

Perhaps they ran a model, mentally or computationally, plugged in some values, and out popped a bubble verdict. Could be, but when you\u2019re testing market (ir)rationality, you\u2019re also implicitly testing the model<\/a>: \u201cIrrational bubbles in stock prices,\u201d concluded the father of the efficient market hypothesis, Eugene Fama<\/a>, in the 1990s, \u201care indistinguishable from rational time-varying expected returns.\u201d <\/p>\n

Fundamentals, and our confidence in them, change, which is reflected in asset prices moving up or down. Against Taleb, Nic Carter<\/a> had the pithiest rebuttal: No sir, it\u2019s $34,500 \u2014 or whatever the market priced it at when he said it. <\/p>\n

When prices fall after a rally \u2014 say, internet stocks<\/a> from 2000 to 2001, home prices<\/a> from 2007 to 2009 or bitcoin in April 2021 \u2014 laymen and professionals alike say that it\u2019s a bubble. But what if the price increases captured something real, and were then validated<\/a> by future events? <\/p>\n

U.S. median house prices<\/a> recouped their losses four years later, and today stand about 60% higher (that\u2019s nominally; deflated by CPI, house prices are about 16% higher in 2021 than at the peak of 2007). Internet stocks, including some of those ridiculed as hopelessly overvalued in 2001, dominate the U.S. stock market \u2014 their products and services have conquered the world. <\/p>\n

The chattering classes\u2019 case against Netflix, just a few years ago, was similarly overwhelming: This hopeful tech company couldn\u2019t possibly monetize its overextended services. It would have to conquer the world for the stock\u2019s then-valuation to make sense\u2026 and then it did exactly that. Netflix expanded services, upped its margins and offered original content. Few are the analysts today yapping about Netflix as an obvious bubble. <\/p>\n

Bitcoin’s scope and promise is larger than any of them. What is its future value? <\/p>\n

For the next year, I predict that bubble charges against bitcoin, of which we saw plenty this year, will fade away. Both because angry nocoiners tire of making them when they\u2019re received with ridicule, and because the longer something stays alive, expands and flourishes, the less sense the etiquette makes. Nobody calls Amazon a bubble anymore, nor Netflix. Even Tesla\u2019s haters have largely surrendered, accepting that what propelled it to the fifth-largest U.S. company by market capitalization<\/a> is something other than bubbling madness. <\/p>\n

No Bitcoiner takes the bubble attack seriously. Price matters, and only bubbles that fail (i.e., don\u2019t recover) are relegated to history\u2019s dustbin as \u201cbubbles\u201d; the successful ones<\/a> are just promising ventures, deemed as such by a future that has hindsight as a guide<\/a>. <\/p>\n

An Escape To Freedom<\/h2>\n

Every society that collapsed into turmoil \u2014 economic, monetary, military, social or other \u2014 has had individuals contemplating when to leave. It\u2019s not an easy decision, forecasting doom and deterioration for one\u2019s country of birth. Many are the migrants who can tell painful stories of uprooting their lives, made increasingly impossible by authorities, famine, war or hyperinflation, for an uncertain existence elsewhere. <\/p>\n

When staring down the “unending path to unfreedom that we\u2019re experimenting with these days” as I argued<\/a> earlier this year, what else is there but escape? When rule by the people<\/em> is replaced by ruling the people<\/em>, escape hatches are crucial. COVID-19 measures all over the world \u2014 and the agitated tenacity with which troves of people embodied them \u2014 showed me that lines of privacy and tyranny drawn in the sand could be approached, flirted with\u2026 and then crossed by about a mile. <\/p>\n

Seeing the writing on the wall, I, like many others, wanted an out. In an uncertain future, you never know which place becomes a beacon of freedom (two years ago, who would have bet on Sweden? And now that it, too, is conforming \u2014 whereto?) and who will confiscate your assets. The idea of a monetary escape hatch<\/a> clicked with me.<\/p>\n

“When in doubt,\u201d wrote Ray Dalio in his new book<\/a>, \u201cget out\u201d:<\/p>\n

\u201cIf you don’t want to be in a civil war or a war, you should get out while the getting is good… History has shown that when things get bad, the doors typically close for people who want to leave. The same is true for investments and money as countries introduce capital controls and other measures.\u201d<\/p>\n

If history is any guide, you won\u2019t be able to peacefully and in organized fashion be able to take your assets with you: \u201cWhen the flight of wealth gets bad enough,\u201d concluded Dalio, \u201cthe country outlaws it.\u201d <\/p>\n

Plenty of Americans have taken that advice, though so far, only in a regional sense \u2014 the exodus from California<\/a> speaks volumes. Others living under oppressive regimes, in the West and elsewhere, have taken similar actions, departing their domiciles for freer pastures elsewhere. <\/p>\n

Bitcoin facilitates the monetary component of that shift, to move value from an unfree jurisdiction to a freer one. When fleeing a sinking ship, you need your body, your health<\/a> and your loved ones. Ideally, you want your most treasured belongings too, which, thanks to bitcoin, you can now carry without anybody knowing. It comes with the more important shift of holding funds outside the purview (and control!) of your invasive government. Dan Held\u2019s Thanksgiving wishes<\/a> stated it clearest: <\/p>\n

\u201cWith governments restricting more of our rights, what would be our light at the end of the tunnel? And with COVID, this trend has accelerated, with our movement and access to goods and resources diminished all for the sake of public safety.\u201d<\/p>\n

You never know what you rely on until it\u2019s abruptly taken away. When your assets are confiscated, your money devalued, your transactions declined and your bank decides to freeze your account for whichever made-up reason it\u2019s trumpeting next, it\u2019s too late. Backups and escape hatches must be put in place before they\u2019re needed. <\/p>\n

I never saw the need for a monetary or financial escape before: I had access to inflation-protection and developed financial markets. I could move my funds wherever I wanted, whenever, for a sliver of what it would have cost just decades ago. Except for the occasional technical glitch or misadventures in poor countries, my transactions were never declined. I had not, to put it bluntly, checked my financial privilege<\/a>. The last decade or so, culminating with COVID-19, convinced me<\/a> that the unproblematic and worriless existence I had taken for granted might not always be that way.<\/p>\n

Measures against this<\/em> public emergency probably won\u2019t be what ultimately does in freedom, collapses societies and ushers in the authoritarianism of dystopias. But the COVID-19 cat is out of the bag now, and the power play that rulers experimented with this year and the last is from now on available at every political negotiation table like it never was before. With only vague references to public safety and astonishingly low barriers, locking up people in their homes is now a feasible option. <\/p>\n

The ability to escape \u2014 to get out \u2014 hasn\u2019t been this important in generations. This time isn\u2019t different, but this time we have Bitcoin. Perhaps that\u2019s enough. <\/p>\n

This is a guest post by Joakim Book. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or <\/em>Bitcoin Magazine.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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