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Three Questions: Prof. Robert Shiller on Bitcoin

The value of the decentralized cryptocurrency Bitcoin has exploded over the last few months; a single bitcoin is now worth more than $5,000. We asked Professor Robert Shiller, who has written about the economic and psychological aspects of market speculation, if Bitcoin is a bubble. 

Does Bitcoin look like a bubble to you? Why?

Bitcoin is the best example today of a speculative bubble, at least as I define a bubble. In my book Irrational Exuberance in 2005, I defined a bubble as “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others' successes and partly through a gamblers' excitement.” Many researchers would find this definition unworkable, because it has psychological terms in it. But the Bitcoin events clearly fit this definition, in 2013 in the original flush of excitement for Bitcoin, and then, after a temporary collapse in Bitcoin value, again now in 2017. 

What do you think is the underlying story driving the rise in Bitcoin prices? How global is it?

The 2013 rise in value of Bitcoin was driven by some basic stories that have great resonance: a new currency that lives in cyberspace without government interference or control. It appeals to independent-minded young people who find government regulations boring and intrusive. The concept of Bitcoin comes from some arcane mathematics of cryptography, which gives the story a sort of glamorous spy-vs-spy appeal, like a James Bond movie. And, wonder of wonders, the genius who invented it, one Satoshi Nakamoto, has never been found. It is a mystery story as well. Such story appeal can fuel contagion, and an epidemic of interest develops. In 2017, the second rise in Bitcoin appears to have something to do with the appearance of ICOs, initial coin offerings, which give Bitcoin an investment banking patina too.

What do you think could cause a reversal in this story?

Usually nothing exogenous is needed to reverse a bubble. The bubble just wears off, as Bitcoin did starting in 2014. The word bubble, as an analogy, may be misleading. Soap bubbles burst once and for all. Speculative bubbles do not end decisively like that. It would be better if they had been named speculative epidemics. We know that disease epidemics can mutate and then return again. Gold itself is a sequence of speculative bubbles, starting in ancient times, and still continuing after thousands of years.

Sterling Professor of Economics, Yale University