Why Predicting Bitcoin “Bubbles” is Pointless
Disclaimer: This author’s opinions do not reflect the opinions of coinbrief.net.
Recently, there has been a trend of tracking Bitcoin prices, and predicting not only where the price will go next, but also predicting when the next Bitcoin “bubble” will be, based on statistical analysis of the market data. One recent analysis predicts, based on trends past trends, that future Bitcoin prices will drop well below $400 and may even possibly dip as low as $270. Another makes the prediction that the market is actually on track for another Bitcoin bubble late this summer, the complete opposite of the first analysis. There are two major reasons why making these kinds of predictions is pointless, which will be discussed in this article.
First, however, this article must be prefaced with a clarification on the methodology of the Austrian school of economics. Mainstream economists often attempt to invalidate the Austrian school by claiming that it is “unscientific” and rejects empirical data while relying purely on deductive logic to come to its conclusions, which would make Austrian economics irrelevant in a world that has, apparently, transcended the rules of logic. A world where human behavior can be quantified, predicted, and dictated based on mathematical equations. These claims are simply not true. Austrians in no way reject the use of empirical data; to say that they do is to confuse using empirical data with the philosophical belief of empiricism, or positivism. Positivism is the belief that all knowledge comes from the collection and calculation of empirical data. In other words, positivists claim that all things can be explained through the use of myriad statistical and other mathematical models. This philosophy seeks to apply the methodology of the natural sciences to all aspects of life, including economics.
Bitcoin Price Movements Cannot Be Predicted Because Humans Are Not Predictable
Before Lord Keynes sparked the rise of positivism in economics, those who studied economics considered human behavior a necessarily unpredictable behavior. The only thing economists sought was to logically deduce the outcome of purposeful action implemented by individuals. In order to do this, economists would write extensive, thorough treatises on economics that attempted to explain the nature of the market by deducing all of its laws from the universally true Action Axiom, which states that all humans employ purposive action. These economists used empirical data as well; they analyzed data in order to find the causal relations between the means employed and the ends that such an employment brought about. And Austrians advocate this kind of empirical analysis! It is essential that we use history to understand the implications of human action.
However, after the rise of Keynesianism, this type of theory-building was lost to the newly eminent economists. Now, the entire science of economics relies upon faulty assumptions, that produce conclusions that have no relevance to the real world market. This methodology is what Austrians reject, not the use of data. Economics must have a foundational theory that explains the progression of the market, which necessarily arises from the actions of human beings, who are governed by the rules of logic; this natural governance is exactly why the Austrians stress the use of deductive logic to form a general theory.
What are economic models without a logical theory to explain the numbers? How can equations alone explain the origin of money, or the formulation of prices? The fact that pure positivism cannot even begin to explain these issues, nor does it even attempt to, is the grounds on which Austrian economists reject a purely empirical approach. Economics is a social science, along with psychology, sociology, anthropology, and political science. Until our understanding of the human brain is absolute, and the ability to replicate, and analyze, the entirety of it’s functioning has been realized, the social sciences will not be completely calculable.
Uncertainty is Inherent in Bitcoin Today and in Bitcoin’s Future
Unfortunately, it seems that this brand of “scientific” positivism is making its way into the markets of the Bitcoin community. We have these people who are attempting to remove the human aspect from the Bitcoin markets and isolate the price trends, hoping to make some kind of meaningful prediction about where the price is heading. But doing so is simply untenable. It is impossible to predict something that is tied to human action. Removing the human element and isolating the empirical data merely ignores the greatest factor that determines the trajectory of Bitcoin. The phenomenon of digital currencies would not exist without human action; neither the very creation of the Bitcoin protocol, nor the establishment of Bitcoin’s monetary value could have occurred without individuals employing provident action.
Why is this important? The very essence of human action is uncertainty. Humans act because the future is uncertain. If the future was certain, there would be no reason to act and, consequently, an economy would not exist. Therefore, anything related to human action is also subjected to the same level of uncertainty, and Bitcoin is no exception. Sure, we can identify trends and speculate about how long the trends will continue. But to claim that we can predict with certainty the trajectory of Bitcoin is an erroneous claim. Predicting what individuals will do with their Bitcoins is no more possible than predicting what someone will decide to eat for lunch, or what kind of car a person will buy.
Analysis can give you an idea of the possibilities, as well as general probabilities, but it will never give you anything close to certainty. Our analyses should be for descriptive purposes, so that individuals can make their own speculative decisions; they should never be used to prescribe action. Besides, if everyone followed your advice on how to avoid the “imminent” summer bubble, wouldn’t the bubble be prevented, thereby proving your prediction false? Or this could create a bubble, due to investors rushing in to buy before the rise, ready to sell at some predicted top. Conversely, wouldn’t a claim, from a high enough quality andor quantity of sources, that the price is inflated, and thus experiencing a bubble, potentially cause investors to begin “panic selling”? If so, this could cause a huge drop in price, and signal that “the bubble has popped.”
When is a “Bubble” in Bitcoin’s Price Really a Bubble?
The second analysis referenced in this article claims that the Bitcoin market is due for another bubble late this summer. This prediction is based on recent price trends, which are occurring in the wake of the Mt. Gox crash, and the end to what many people consider the first Bitcoin bubble. However, it is doubtful as to whether or not the price reached at the height of Mt. Gox’s success was really a bubble. Was the peak price of Bitcoin really the result of an inflationary bubble? Or was it simply the price that was established as the result of the massive demand for Bitcoin?
A bubble happens when individuals get their hands on an inflated money supply, which lowers the money’s marginal utility and therefore stimulates the demand of the consumers. As a result of this increased demand, prices rise. After the inflation makes its way through circulation, the increase in prices equalizes the purchasing power of the new money. Because of higher prices, people no longer gain an advantage from having an increased money supply. This situation does not seem to parallel the Bitcoin “bubble” at all.
While there is debate on whether or not the dishonesty of Mt. Gox, regarding the status of their members’ deposits, may have generated a bubble effect similar to that of a fractional reserve bank, it is certain that the rise in the price of Bitcoin did not come as a result of an increased supply of money that encouraged increased investment of Bitcoin. Mt. Gox customers simply believed that their deposits were safe, when in fact they were compromised. However, that does not equate to an expansion of credit or any other increase in the supply of money.
Additionally, it doesn’t seem likely that the Federal Reserve’s policy of Quantitative Easing has affected the price of Bitcoin, since the digital currency is not popular enough to warrant attention from those investors who would benefit from QE. The more plausible explanation for this Bitcoin “bubble” is that the money lost in the Mt. Gox crash, combined with the fear created by the crash, led to a contraction of the supply of Bitcoins on the exchanges, as well as hesitation from investors, and a subsequent decline in trading volume. This, combined with China, and some other governments, attempting to tighten restrictions on Bitcoin caused the large dip in Bitcoin’s price.
Conclusion: Bitcoin’s Future “Bubbles” or Lack of Bubbles
The assumption that the height of Bitcoin’s price was the result of a bubble is in itself dubious. However, using that assumption as a standard for analysis, and then claiming that based on this analysis, the market is due for another bubble is completely erroneous. In reality, the exchanges that replaced Mt. Gox have implemented security measures to prevent another Gox-like crash. In fact, recent events, such as China’s crackdown on Bitcoin trading, and the DoD’s new investigation into Bitcoin, point to the possibility that prices might not rise, and may in fact fall or remain fairly steady. That in no way validates the analysis that Bitcoin is heading for a major drop in prices. Something may happen, other than the predicted summer bubble, and the price of Bitcoin could significantly increase.
Only time will tell what the future holds. Rather than worry about the future of Bitcoin’s price in dollar terms, it would be much more productive to spread awareness about crypto-currencies and promote their acceptance as money. The virtues of crypto-currency do not lie in its use as an investment; it lies in its ability to facilitate society’s transition, from a state of central control, to a state of human liberty.
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I really enjoyed this article. I am just getting my feet wet with crypto-currency & my initial thoughts on the whole “movement” was it is a bubble waiting to burst. With a little more experience, understanding, & drinking the Bitcoin koolaid, I am starting to come around a bit on my conservative thinking.