AMERICAS BUSINESS
Bitcoin Crash?
What is Bitcoin’s primary function? What is the current use being made of it? Is it a new form of fiat currency? Does it behave like a commodity? A stock? Or is it a new type of speculative asset of a fundamentally new variety? These questions are obviously essential when one is tempted to speculate on the future of Bitcoin and by extension on its real value. So why have I decided to entitle this article Bitcoin Crash rather than giving it a less entrenched and more neutral heading? Just because, although the value of Bitcoin has gone from 7 hundredths of a cent (1 $ was worth 1,009.03 BTC at the time of the first public sale of Bitcoin on 5 October 2009) to $7,524.21 at the time of writing of this article, there remains great confusion and uncertainty among investors, regulators, economists and academics around the true nature of Bitcoin. In a recent article co-written with my colleague, Arash Aloosh of NEOMA Business School, entitled the psychology of cryptocurrency prices, we question the psychological dimension of cryptocurrencies and have observed that certain cognitive biases relating to the nominal value appear to be more frequent in the cryptocurrency market than in the equity market. According to so-called neoclassical finance, the market price of each share should represent its intrinsic value. For this to be so, markets must be efficient, but in reality, nothing is less sure as far as cryptocurrencies
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are concerned, because the notion of efficiency assumes that investors have rational expectation concerning the development of Bitcoin and its global adoption. How is it possible to defend the hypothesis of the rationality of individuals dealing with Bitcoin, when specialists in the sector have great difficulty in agreeing even on its basic nature? Not to mention the extreme complexity of its economic, political, legal and technological aspects. Astonishingly, although it is undeniable that cutting-edge expertise is essential to evaluate Bitcoin’s prospects, all over the world celebrities such as the actress Gwyneth Paltrow, the rapper Snoop Dogg and the footballer Lionel Messi have promoted it. It is easy to see
that the enthusiasm of the layperson for Bitcoin is without precedent. I think that this enthusiasm coupled with its extreme volatility and the confusion that still surrounds the exact nature of Bitcoin is a quite unique phenomenon, and a worrying one that should alert investors and regulators to the fragility of this market. The major question that this article is attempting to address is how can we know if the spectacular rise of Bitcoin could be principally psychological in nature? If that is the case, a future crash is very likely! And if we accept this likelihood, how is this speculative bubble different from others, such as the Internet bubble?
