Bitcoin: Is It A Bubble?

It does not seem that bitcoin is suitable for ordinary consumer or business or government use.

There may be good reasons for buying bitcoin, but the dominant reason at the moment is the parabolic rise in price that is fueling the investment demand.

Transaction demand for bitcoin is primarily from the underground economy.

A bubble is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior.

Warren Buffett recently noted:“You can’t value bitcoin because it’s not a value-producing asset.” He added that there’s no telling how far bitcoin’s price will go and described it as a “real bubble in that sort of thing.”

The value of bitcoin is tied to the aggregate value of transactions using bitcoin, which is the transaction (means of payment) demand for bitcoin. The transaction demand, Q, is simply P*T, where P is the price of bitcoin, and T is transaction volume in circulation. The transaction demand provides an anchor for the price. The other source of demand for bitcoin is investment demand which includes speculative demand and store of value. As a store of value, bitcoin is a safe haven like gold, a so-called digital gold. Furthermore, bitcoin's utility as a store of value is dependent on its utility as a means of payment, Kellher explained it succinctly, “if bitcoin does not achieve success as a medium of exchange, it will have no practical utility and thus no intrinsic value and won't be appealing as a store of value”. Simply put, if there is no transaction demand, then there is no store of value demand.

We will argue that bitcoin is not a suitable means of payment for ordinary consumer or business or government transactions; it is rather well suited for the means of payment in the underground economy. Then we will discuss the Chinese demand for bitcoins which averaged daily volume of 2 billion dollars in 2016, and its aftermath.

The Coinage Act of 1965 states: "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues." This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no federal statute mandating that a private business, a person or an organization must accept currency or coins as payment for goods and/or service (excerpt from an FAQ on Treasury site).