When it comes to economic bubbles, there is perhaps no single greater authority than Yale economics professor Robert Shiller. Shiller wrote a seminal book on speculation and its devolution into mania, called Irrational Exuberance. The book analyzes bubbles throughout centuries. Shiller has won the Nobel prize for his work in the area. Among his other contributions, he has created tools and indexes for measuring price levels and valuations. So when Shiller suggests that the bitcoin space might be a bubble, investors would be wise to take note.
"Irrational Exuberance" and Bitcoin
In an interview with Quartz, Shiller said that the "best example right now" of irrational exuberance is bitcoin. He continued, "and I think that has to do witht he motivating quality of the bitcoin story...it starts with Satoshi Nakamoto...the mysterious figure who may or may not be real. He's never been found. That has a nice mystery quality to it. And then he has this clever idea about encryptiion and blockchain and public ledgers, and somehow the idea is so powerful that governments can't even stop it." All told, the story is a compelling one and part of the reason that bitcoin has shot up to become the most prominent and largest cryptocurrency by market capitalization in the world.
Shiller says that the third edition of Irrational Exuberance argues that "there's a fundamental deep angst of our digitization and computers, that people wonder what their place is in this new world...somehow bitcoin fits into that and it gives a sense of empowerment: I understand what's happening! I can speculate and I can be rich from understanding this!"
Is it a Bubble?
The question remains, though: is bitcoin a bubble? Shiller didn't speak with certainty on the matter, but suggested that he had a sense that "something is exciting" at the moment. On the topic of ICOs, Shiller remarked that "that's a classic bubble," although he was unfamiliar with the concept prior to the interview.
As with any other bubble-type scenario, identifying when and to what extent it will pop is always the difficult part. Because this is impossible to predict with assuredness, investors would be wise to approach the cryptocurrency space with caution. Yes, there are opportunities (or at least there have been up to this point) to make a huge amount of money off of speculative investments in the area. That is not to say, however, that past performance will be any guarantee of future success. Beyond that, a compelling story is not enough to ensure long-term viability or success, either. After all, as Shiller says, "big things happen if someone invents the right story and promulgates it."