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As Dimon Shrugs Off ‘Stupid’ Bitcoin Buyers, One Bank Asks: ‘What Is A Bubble?’

"The dot com bubble had the internet. A constant theme of bubbles is the ability of speculators to shout that dreaded cry "this time it's different." Logical arguments against the bubble can then be disregarded as speculators declare that the doubters simply do not understand that the world has changed."

One day, we’ll stop talking about how Bitcoin is a fraud and how anyone participating in what is clearly a modern day tulip mania is either an idiot or at best, a speculator.

But today is not that day.

Because today is a day when what we’ve taken to calling “make-believe space money” soared above $5,800. If you missed it earlier or otherwise just want to laugh at it again, here’s the chart:


Just so you’re aware of just how out of control this has gotten, this P.O.S. is now bigger than Morgan Stanley, with a “market cap” of something like $94 billion:


Although Jamie Dimon swore he wasn’t going to talk about Bitcoin anymore, he couldn’t help himself on Friday when prompted by a moderator at an Institute of International Finance conference.

His comments were nothing short of hilarious and to the extent you think Dimon is actually “worried” about this, you should probably watch below and reassess whether this is a man who seems concerned:


We’re not sure that sounds like a guy who thinks his livelihood is at risk. Here’s the Cliffs Notes version:


In any event, we though that in light of Dimon’s most recent verbal assault and in “celebration” of Bitcoin’s market cap milestone, we’d excerpt a couple of more passages from the UBS note we mentioned earlier today. Enjoy…


Are crypto-currency prices a bubble?

What are bubbles? The term “bubble” is a bit like the term “recession” – a word that is much used in the media but does not have a formal definition in economics. A bubble is assumed to occur when asset prices cannot be explained by fundamentals. However, there has to be more to a bubble than pricing alone. Fundamentally-based models are not entirely accurate, and so a price may appear to deviate from fundamentals and not be a bubble. Deviating from fundamental value must be a necessary condition, but not a sufficient condition for a bubble.

Bubbles nearly always occur when there is something new, or relatively new in the economy. Change, by definition, creates uncertainty about the future. The tulips of the seventeenth century were new and exotic (to Europeans). The joint stock companies of the Mississippi and South Sea bubbles in the eighteenth century were relatively new financial structures. The 1920s saw mass entertainment (radio and cinema) and mass transport (cars). The dot com bubble had the internet. A constant theme of bubbles is the ability of speculators to shout that dreaded cry “this time it’s different.” Logical arguments against the bubble can then be disregarded as speculators declare that the doubters simply do not understand that the world has changed. The problem with this theory is that the world never changes that much.

A second characteristic of bubbles is that there must be a delay in expected real-world (rather than asset-market) returns. If an asset promised a real-world return in a short space of time, any failure to deliver would undermine the asset price. The great thing about the tulip bulb speculation was that the purchaser had to wait until the bulbs had grown in order to be able to see what flowers had been purchased. The Mississippi and South Sea bubbles both depended on fabulous wealth from far distant colonies and trade that was supposed materialize in a few years. The dot com bubble promised future wealth, and in the meantime nothing as vulgar as earnings need be considered. Of course there were asset price gains to be realized immediately in each bubble, but the underlying value story could not materialize for some time.

In the later stages of a bubble there is normally a mix of buyers in the market. There are those who still believe in the potential realworld profit at some distant point in the future, and there are those that are likely to be investors who are buying purely in anticipation of a rising asset price, without any reference to future profit. Such investors are not looking to future value, they are hoping that they can get out before the bubble bursts. In the Mississippi Bubble in 1720, the promoter (Law) complained that people were trying to convert shares into gold for speculative gain, rather than holding on in the expectation of future returns (which never materialized). The South Sea bubble in the United Kingdom in 1720 saw similar speculation – not just in the South Sea company, but in the hundreds of imitator companies that were launched at the same time. When there was a regulatory attack on such companies, the speculative owners of stock were forced to sell earlier than anticipated. These stocks had been bought on margin, meaning that the owners were looking entirely for speculative short-term gain and not for longerterm value. The regulatory tightening precipitated a sudden collapse in price.

Are crypto-currency prices a bubble? Applying the aforementioned characteristics to cryptocurrency prices, they demonstrate most of the characteristics of a bubble. Cryptocurrencies are relatively new. The real world benefits are said to take years to materialize, even among evangelists. And the relatively high volume of cryptocurrency turnover, against limited realworld use, suggests that many buyers are seeking speculative gain, never intending to use cryptocurrencies to make a real-world transaction. The remaining characteristic – fundamental value – is the most difficult to assess, since unlike in government-backed currencies, no crypto-currency has an economy behind it. But with each of the other characteristics of typical bubbles in evidence, a twentyfold increase in bitcoin prices in just two years, and an absence of any fundamental economic backing, cryptocurrency prices are almost certainly a bubble.


2 comments on “As Dimon Shrugs Off ‘Stupid’ Bitcoin Buyers, One Bank Asks: ‘What Is A Bubble?’

  1. Heisy. It’s funny how much I typically agree with your thought process and conclusions. But I don’t see eye to eye with you on crypto. I own Bitcoin and ether with the expectation that we are in a bubble, and I will have the opportunity to commit more at better prices. I also own Bitcoin and ether with the full knowledge that the government may come after it and attempt to crush it as soon as it becomes large enough to be a threat. But where we differ is that I don’t think the government will succeed. Transactions in crypto occur daily now, and yes, many of them are illegal. But are the criminals being caught? No. Is Bitcoin being shut down or corrailed? No. What makes you so sure that a distributed ledger stored across thousands of devices can be controlled by any government or a group of governments? I’d like to know the answer to that question.

    • Furthermore, Dimon is hard to take seriously in his comments. On one hand he questions why anyone would want to use bitcoins in a transaction, and then in the next case he validates it’s use-case (Venezuela, Cuba, etc). Talk about contradictions in the same breath. For us millennials, the use case is clear: when we travel the world several times a year, no more constant trips to shitty ATMs with suspicious characters about. No more high fee foreign transaction credit cards, just….Bitcoin. I don’t get calls from AmEx asking if I’m in Tulum or St. Petersburg. And if I can identify that value, that world-changing leap forward in transactional efficiency, then Jamie Dimon should be able to as well.

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