Why I think Bitcoin’s price is so high and why I think it is a bubble approaching the bursting point.

The price is so high because so many people do not have a good conceptual understanding of how speculative financial bubbles work. All they see is the price of an asset continually rising and they don’t want to miss out. What they don’t realize is that a point of saturation is eventually reached where most that want to buy have already done so. And I think we are getting close to reaching that point given the current ‘hotness’ of the topic in regular mainstream non-financial news and forums.

Once all these newbies have jumped in that are going to jump in, then they just sit back and watch their computers and say “OK, let’s see it rise!” But the only thing that had been driving the price higher was from all the demand from all those Bitcoin newbies versus the supply from willing sellers. But with everybody already in that is going to get in, the balance shifts to a heavier supply of those wanting to sell than those wanting to buy. That is the point where the bubble bursting point approaches.

Now, as the trading price starts to steadily slide people say “Uh oh, let’s cut our losses and sell”. But if everyone wants to sell at the same time with few buyers, then you have a bursting of the bubble — a crash in the price of the asset. And the price doesn’t settle until it reaches a price where the asset’s intrinsic value is seen by the end users of that asset as worthwhile. For instance, after the tulip bulb bubble burst, I imagine the price of the bulbs settled back down to a price that gardeners were willing to pay for the bulbs.

To determine the non-bubble fair value for any asset, you need to be confident there is enough demand from a market of buyers who will say “sure I’ll pay that much for such and such an asset because I really want it or need it or know of somebody else that I can sell it to who really wants it or needs it for its intrinsic value.” But it’s hard to gauge Bitcoin’s intrinsic value even if it does have some useful value in a transaction, because while the number of Bitcoins may be necessarily limited, the number of other virtual currencies that use the same or basically the same blockchain technology that provides that usefulness, is not limited.