Was There a Bubble in bitcoin?

Bitcoin peaked in December at nearly $20,000, but by early February its price had fallen 70% to around $6,000. Bitcoin skeptics were quick to claim that they had been correct about calling bitcoin a bubble, even if they had been doing so since before it had reached $1000. Yes, Paul Krugman, I am speaking about you.

So, was bitcoin in bubble territory?

There have been many articles on the topic, but one of the more interesting ones appeared yesterday at Coindesk. Their conclusion, it was a bubble, but that the bubble was a good thing. Bubbles, you see, lead to technological progress and the build out of infrastructure that eventually leads us to the promised land. From Coindesk:

One way to look at the current bubble is through the lens of Carlota Perez, the Venezuelan theorist who wrote about the interplay between technology and capital markets in an influential book called "Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages." She concluded that bubbles - and their inevitable collapse - are an integral, in fact necessary, part of the economic dynamics through which transformational technologies take root in society.

This view means that technological progress requires a bubble.

Perhaps this is true to some degree for most technologies. As an Austrian however, I view the scale of the bubbles of recent decades very differently than the enthusiasm for a new technology of which Perez speaks. These recent and enormous bubbles have been driven by excessive central bank money printing and the socialization of losses (bailouts). We need to be careful to recognize the difference.

It is clear that Satoshi meant to point the dagger of bitcoin directly at the heart of central bank and government fostered bubbles and theft. In fact, the bitcoin genesis block contained the following message:

03/Jan/2009 Chancellor on brink of second bailout for banks

It is clear that bitcoin's deployment into the financial wild on that day was a response to the interference of governments in finance and economics and the boom-bust cycle that they have caused. That is, bitcoin is intended as medicine for Bubble Disease, a potential cure. As such, bitcoin's price represents its effectiveness in this effort and cannot itself be a bubble. The medicine is either working at a particular point in time (bitcoin's price is rising), or its effect on the disease is weakening (bitcoin's price is falling).

I recall a line that was popular a few months ago, bitcoin isn't the bubble, it's the pin. I agree with this. There have been plenty of other periods when bitcoin's medicine seemed to be losing its potency, but it has always reemerged more efficacious than ever. I expect a repeat of this.

Disclaimer: This is not investment advice, solely the opinion of someone who is currently losing money.