Yale University scholar: There is no bubble in the Bitcoin market

Vikram Mansharamani, a lecturer in ethics, politics, and economics at Yale University, recently published an article explaining why Bitcoin is not a bubble .

Is there a Bitcoin bubble?

Mansharamani is also a senior fellow at the Harvard Kennedy School and the author of Boom-Bust Studies: What Happens Before a Financial Bubble Bursts.

He recently asked in a LinkedIn article: Is the Bitcoin bubble about to burst?

In his best-selling book Bubbles & Crashes, he developed a systematic framework for locating bubbles. This method is based on five major angles to make a probabilistic assessment of the upcoming crash.

(Yale University scholar Vikram Mansharamani)

The point of this book is that only by adopting a multidisciplinary analysis perspective can we better understand an economic cycle from prosperity to depression. The five perspectives used to locate bubbles are: microeconomics, macroeconomics, psychology, politics and biology.

Mansharamani calls check a bubble, blank lens means there is no bubble, and half-check is in between the two states.

However, he made several mistakes in his analysis of the Bitcoin market, which I have already pointed out on Twitter and will explain in detail below.

Microeconomics

Mansharamani explained:

Usually, under the influence of efficiency logic, things that are out of balance will adjust themselves. However, sometimes the reflexive force may break through the resistance of this self-adjustment and create extreme situations.

He cited the classic efficient market theory and borrowed George Soros' (American financial economist) Theory of Reflexivity to propose improvements.

So the question essentially becomes: is the rise in Bitcoin price accompanied by higher (volatile market) or lower (efficient market) market demand?

Mansharamani said the evidence for this is mixed. He believes that as a safe-haven asset, demand for Bitcoin will increase during economic and political crises, regardless of whether the price of the currency rises. (He cited the rise in the price of the currency after Brexit as an example.) In recent times, trading volume has begun to decline.

Conclusion: Half-Check

Macroeconomics

The second angle involves the effects of debt and asset price leverage. He pulls some of this directly from his book:

…the relationship between debt and collateral (ie, down payments or holdings) and asset prices can create a 'toxic cocktail' that can improve or worsen an individual's financial situation.

He wrote in his LinkedIn article:

There is no evidence that leverage helps drive prices higher. There are no futures contracts that can increase exposure to the minimum collateral. Therefore, leveraged trading is not available.

Conclusion: Blank

psychology

He wrote:

Overconfidence and new-age thinking are hallmarks of this third angle psychology. Whenever someone develops the mentality of ‘this time is different’, consumers should beware. Such ‘different’ situations are rare, and asset prices cannot rise indefinitely. Instead, they rise and fall. For that matter, the price of Bitcoin is no exception.

This is vividly demonstrated in the field of Bitcoin. Peter Thiel, Henry Blodget, Kim Dotcom and other outstanding talents from Silicon Valley have predicted that the price of a single Bitcoin will rise to 100万美元.

Conclusion: Check

Political Science

What impact does the government's regulatory policy have on the asset market? Regulatory policies can affect the price of any asset, and its supply or demand will also change. At the same time, any asset has moral hazard (the risk that the insured may be unreliable).

So when it comes to Bitcoin, is the government intervening in any way to drive up the price of the currency? No. Instead, regulators are trying to suppress public interest in Bitcoin. For this, please refer to the recent news in China.

But when it comes to moral hazard, it doesn’t seem to exist in the Bitcoin space. When the Bitcoin exchange Mt. Gox went bankrupt, no one bailed out participants who lost millions of dollars. Most Bitcoin market participants trade with an understanding of the risks of this asset. Bitcoin investments are not protected by the Federal Deposit Insurance Corporation (FDIC) and are not part of the Federal Reserve system.

Conclusion: Blank

biology

Studying financial bubbles through epidemics can help us assess the maturity of a particular mania. If we compare investment enthusiasm to the spread of a fever or flu in a population, the variables we should consider are the infection rate, the elimination rate, and most importantly, the proportion of the population that remains unaffected.

When it comes to Bitcoin, the pool of potential buyers (and thus vulnerable people) is truly enormous. It was difficult to buy Bitcoin in the first place, and institutional investors were discouraged. Specialized exchanges, online wallets, and the need to store private keys all created a lot of friction, driving away many potential users. There are no ETFs yet.

Conclusion: Blank

Mansharamani's analysis summary

He explained:

Therefore, from the above five perspectives, only when all the above five perspectives are met can it be considered a "real bubble that is about to burst". Bitcoin only scored 1.5 points. From the current situation, Bitcoin is in the process of transforming into a bubble, but it is not a bubble at present.

I used a traffic light that changes color to present the analysis results. Green means there is no sign of foam; yellow (amber in the picture) means foam is about to form; red means foam already exists!

This result is similar to Vinny Lingham's analysis. There is no bubble at present, but once the price reaches 3,000美元, a bubble is likely to occur.

I don’t care that the price of a coin is likely to reach $2,150 due to external factors such as ETFs, and whether such factors affect supply and demand. However, once the price of a coin continues to rise and exceeds $3,000 due to market mania, short squeezes, media hype or fear of missing out (FOMO), then we should be alert and we are moving towards a bubble.

Correction of Mansharamani's analysis results

I corrected several errors made by this researcher regarding his analysis of the Bitcoin market.

Correction 1: Microeconomics

The question he poses is whether the rise in Bitcoin price is due to higher (volatile market) or lower (efficient market) market demand? He uses exchange trading volume to analyze demand and activity.

He noted that trading volumes have decreased recently, concluding that demand has fallen as prices have risen.

Data on trading volume has always been fuzzy. Due to leveraged trading and zero-fee policies, Chinese exchanges once accounted for 90% of global trading volume.

After the People’s Bank of China (PBoC) announced a ban on margin trading in January, and Chinese exchanges stopped offering zero-fee trading, global bitcoin trading volumes took a hit, even as the price of the currency continued to rise (with a few short-term dips).

However, except for China, exchanges in other countries have always charged normal fees, so there is no so-called heavy damage. Therefore, global trading volume is not the best way to measure demand.

Transactions and transaction fees are more effective data. As the price of the currency rose after June 2015, both of them were on the rise.

Therefore, the analysis result from this angle should be switched from Half-Check (between foam and non-foam) to Check (foam).

Correction 2: Macroeconomics

This angle is also related to leverage. The researcher wrote:

There is no evidence that leverage helps drive prices higher. No futures contracts exist to increase exposure with minimal collateral.

However, before January this year, there was a very extreme phenomenon of leveraged trading on Chinese exchanges. The South China Morning Post once described this crazy phenomenon:

One trader pointed out, 'When I decided to trade with leverage, I took a huge risk. However, when the trading system crashed, I had no way to stop the loss, so I think the platform should compensate investors for their losses.'

According to the South China Morning Post, before the market crashed, the trader borrowed 9.95 million RMB from Huobi, using his 409 Bitcoins as collateral, to buy 1,228 Bitcoins.

In addition, Bitcoin futures exchange BitMEX still provides leveraged trading services.

However, China has banned leveraged trading, and BitMEX's trading volume accounts for a relatively small proportion of global trading volume. Therefore, the analysis result from this perspective should be that it was Check (bubble) before January 2017, and it is blank (not a bubble) now.

Therefore, Bitcoin's final score should be two points, half a point higher than the original analysis result.

In other words, there is no bubble in the Bitcoin market right now, but we are heading towards one. Here is my adjusted summary of the researcher’s analysis: