Of bubbles and metaphors

with the prices of crypto-currencies quickly rising out of everyone’s reach, one of the more common questions being asked is: “are we in a bubble?”

what this metaphor is really asking for is a risk assessment regarding price stability and the likelihood that our potential investment may see a price collapse that leaves us somewhat poorer and less hopeful about the future

to discuss the subject in a language less informal than that of bursting bubbles, let’s define the condition in question as an over-exertion of the market. markets have buyers and sellers, the numbers of which wax and wane, and as the ratio of these two classes of participants changes, it causes prices to rise and fall, like the tides. generally, as demand for a commodity rises, it stretches the supply causing price hikes and an attendant enthusiasm from those long the position (those who own the commodity). at some point prices are sufficiently high (a point of over-exertion) that demand starts to loosen and prices fall, finding the other end of the pendulum, only to rise again

however, to assess whether market is over-exerted one cannot merely look at the price of an asset e.g. a single share of Berkshire Hathaway is quoted presently at $249,610 yet no one would point to it and claim it’s ready to burst. similarly, a rapid rise in the price of an asset is also not sufficient to classify a market as being in a bubble — consider that Monster (the beverage) saw a 11,731% gain since it’s IPO (as of Aug. 2016) but has found stability, and was thus never a bubble

a “bubble” therefore is a condition of instability. anyone looking at Monster’s scandalous ascent may have concluded it would soon burst, but they would have been wrong. the asset did not collapse in price, nor will it do so at this point

to answer the question of price stability we must turn to the fundamentals of a particular market, in this case, the nature of crypto-currencies, their structure and potential

the single, most important fact to comprehend about Bitcoin, Ethereum, Dash or any of the nearly 2,000 “alt-coins” in existence today is that their supply is limited i.e. the amount of currency available for purchase is finite

this differs substantially from sovereign currencies (those issued by governments, like the Euro or US dollar) whose aggregate monetary supply (i.e. the total number of dollars in existence) is a factor of credit. the signifcance of the previous…