Is the Bitcoin Bubble for Real?

NEW YORK (MainStreet) —Just this January, one Bitcoin was worth less than $20. Then the price climbed up to more than 13 times. its own value, to hit a new peak around $266 on April 10. That foreshadowed the fall: last week, one unit of the encrypted virtual currency was worth as little as $68.50, down almost 75%. Today a single Bitcoin is worth about $137. All this yo-yoing boggles the mind, but even before the recent swoon, many people were questioning whether the online currency-cum-commodity was in the midst of a bubble. After the price collapse in last week, it's worth asking: Was there a Bitcoin bubble before, and is it over now?

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Mere hours before the Bitcoin market crashed, Nicolas Christin, associate director of the Information Networking Institute at Carnegie Mellon University who has studied Bitcoin since 2011, said he was uncertain whether the dynamics indicated a bubble or whether Bitcoin was reaching its long-term value. "If I knew, I would be rich," he said. "But it definitely has all the typical characteristics of a bubble." Based on Bitcoin's exponential rise, Christin predicted that there would be devaluation at some point.

His prediction of a crash came true even sooner than he thought.

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Hindsight being what it is, there's a consensus that Bitcoin was in bubble mode, says Reuben Grinberg, an associate in Davis Polk's Financial Institutions Group, who has studied Bitcoins since he was at Yale Law School. "I think there is little question that the huge price run-up was due to bubble investing – people investing primarily because they see the price going up ... and wanting to make a quick buck rather than really thinking and understanding the fundamentals of Bitcoin," he said. "If that's the mentality of the people who cause demand to spike, which causes the price to increase astronomically, then any little thing will spook these same investors."