The Bitcoin Debate-Is It Overvalued?

Been watching the bitcoin debate back and forth.  There is a ton of confirmation bias in it.  If you own bitcoin, you think it’s going to the moon.  I have heard bitcoin holders tell me it’s still cheap. If you don’t own it, you think it’s Holland tulip bulbs.  Here is a chart I pulled from Ycharts.
^NYB Chart

^NYB data by YCharts

I added the Bitcoin Investment Trust Index just because.  As you can see, Bitcoin has dropped from the highs.

I don’t know if Bitcoin is cheap or expensive.  It all depends on your time horizon.  If you have a short time horizon, it looks pretty expensive to me.  Markets that run up like Bitcoin did this year aren’t sustainable.  A healthy pullback is good for the long-term health of the market.  It gets weak hands out of the market and brings some sense and sensibility to the bulls.

I think it’s also important to note that Bitcoin’s financial ecosystem is nowhere near fully developed.  It barely has well-functioning cash markets let alone options and derivatives.  CME will list futures, but it remains to be seen how those will trade.  I wouldn’t describe the Bitcoin market as “liquid”.  It’s not like FOREX markets which are highly liquid.  It doesn’t mean it can’t get there, but today it isn’t.

If you are a bull or bear and have an opinion, where do you think the Bitcoin price will be a year from today?  Three months from today?  As you consider it, read Albert Wenger’s post on normal distributions with fat tails.  I’d also remind everyone that Eugene Fama has postulated that you can only see bubbles in the rearview mirror.  If you knew the market was in a bubble, you could profit off of it. The question is, how do you short Bitcoin reliably if it’s in a bubble or what other market is correlated enough to short?

 

  • Jason

    I don’t think you necessarily have to identify bitcoin as a bubble in order to profit from it. Simply trading it like any other trending market -getting in and trailing a sell stop- can allow you to make a bundle w/o having to know where the top is or even whether or not it is overvalued. Likewise, a trader could simply use some sort of metric to identify a trend change (price structure, moving average, Donchian band, etc.) before shorting it. This will be a lot more doable once we can trade the futures contracts on bitcoin.